Apple Could Join the Dow Jones Industrial Average

Apple joining the Dow Jones Industrial Average may mean bigger changes to the blue-chip index than most people expect.

May 9, 2014 at 1:30PM

On June 9, Apple (NASDAQ:AAPL) will commence a seven-for-one stock split. This paves the way for the company to join the Dow Jones Industrial Average (DJINDICES:^DJI) as its high stock price will no longer be an issue. While Apple is not a lock to become a Dow company, I believe the blue-chip index's committee may use the opportunity to expand the Dow from 30 components to 40 or even 50. Read on to find out more.

Apple
Apple has long been conspicuously absent from the Dow. Alongside Dow stalwart ExxonMobil (NYSE:XOM), the tech juggernaut has been the U.S.' first or second largest company by market cap since 2011.

AAPL Market Cap Chart

AAPL Market Cap data by YCharts.

Apple, though, has never been seriously considered for membership as its high stock price would have an outsized effect on the index. The Dow Jones Industrial Average is structured as a price-weighted index, meaning its weightings are determined by the stock prices of its component companies and nothing else. This differs from the S&P 500 (SNPINDEX:^GSPC), which is weighted by companies' market capitalization. As the largest company in the U.S., Apple justifiably has the largest effect on the S&P 500.

Given the Dow's structure, Visa's $200+ stock price has the largest effect on the index, carrying 8% of its weight even though the company itself is one-third the size of ExxonMobil. If Apple today were to replace the smallest stock on the Dow (Cisco Systems) without undergoing the stock split, it would make up over 18% of the index, completely skewing things. After the upcoming stock split, based on the current price Apple stock would trade for $83 a share; that would place the company at No. 14 by weight if added to the Dow.

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Growing the Dow Jones Industrial Average

The Dow Jones Industrial Average has long been criticized for its outdated method of weighting. CME Group, which owns 90% of the Dow Jones' indexes business, stated in an online FAQ that it has "thought about increasing the number of stocks."

This wouldn't be the first time the index size was increased. Before it was called the Dow Jones Industrial Average, Charles Dow's initial stock average appeared in the precursor to today's Wall Street Journal, the Customer's Afternoon Letter. The initial average contained just 11 stocks. This was expanded to 12 stocks at the Dow Jones Industrial Average's inception in 1896. The index was expanded to 20 stocks in 1916 and to 30 in 1928.

Increasing Dow membership to 40 or 50 stocks could bring in Apple, as well as Warren Buffett's Berkshire Hathaway and numerous other companies that have been conspicuously absent. This could help the Dow Jones Industrial Average more fulfill its mission of providing "a clear, straightforward view of the stock market and, by extension, the U.S. economy."

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Dan Dzombak can be found on Twitter @DanDzombak or on his Facebook page, DanDzombak. He has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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