The Dow Just Gave HP Another Reason to Break Up

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) just removed one major reason why Hewlett-Packard (NYSE: HPQ  ) shouldn't break itself up: Later this month, the technology veteran will no longer have a Dow seat to defend.

Image source: HP, edited by author.

That's right: The Dow Jones Averages Committee is revoking HP's membership card on Sept. 23, 2013. Credit card giant Visa (NYSE: V  ) will take HP's seat, though the change is part of a larger makeover. Bank of America and Alcoa are also leaving, to be replaced by Goldman Sachs and Nike, respectively.

It's the largest changing of the Dow's guard since April 2004, when the index sought to reflect "the continued growth of the financial and health care sectors." The official reason for all three changes this time is even simpler: They were "prompted by the low stock price of the three companies slated for removal and the Index Committee's desire to diversify the sector and industry group representation of the Index."

The net effect on the Dow is a smaller Silicon Valley cohort and no pure-play manufacturing presence at all. On the other hand, the Dow gets a bit closer to the American consumer thanks to the additions of Visa and Nike.

The index will keep ticking, but these changes will have a welcome side effect. HP's exit was long overdue, and now CEO Meg Whitman has one less reason not to split her company in half.

Damaged by serial scandals and a revolving door in the CEO's office, the stock has been among the Dow's worst long-term performers for years. It's still the Dow's weakest link over the past three years despite a rousing 56% gain in 2013.

HPQ Chart

HPQ data by YCharts.

Whitman is pushing HP through a painful five-year turnaround plan, but the company could recover much faster if it were split in half. The synergies between HP's consumer and business-class operations are nonexistent, so why not allow each division to focus on what it does best? Moreover, investors would be able to own only the part of HP they believe in -- no need to worry about the component that doesn't fit your thesis.

Dow membership always seemed like a roadblock to that kind of drastic solution. Giving up your Dow seat in exchange for a leaner corporate structure is not unheard of, but it's not an easy or popular road to walk.

So now I'm waiting for HP to take the next logical step: announce the breakup into two separate, tradable entities. Bill Hewlett and Dave Packard would smile on that move, and so should HP's current shareholders.

The tech world has been thrown into chaos as the biggest titans invade one another's turf. So far, HP has lost more ground than it has gained. At stake is the future of a trillion-dollar revolution: mobile. To find out which of these giants is set to dominate the next decade, we've created a free report called "Who Will Win the War Between the 5 Biggest Tech Stocks?" Inside, you'll find out which companies are set to dominate, and we'll give in-the-know investors an edge. To grab a copy of this report, simply click here -- it's free!

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9/29/2016 1:07 PM
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HP CAPS Rating: ***