Please ensure Javascript is enabled for purposes of website accessibility

Why Amazon.com Won't Replace GE in the Dow

By Adam Levine-Weinberg - Feb 5, 2018 at 9:35PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

GE is likely to get dropped from the Dow Jones Industrial Average in the near future. But Amazon.com won't be its replacement -- despite its rapid growth and broad impact on the economy.

Storied U.S. industrial giant General Electric (GE -0.20%) has had a rough time over the past year. Earnings expectations have plunged, driven primarily by a big downturn in the company's power business. Last month, GE announced a massive charge related to its legacy insurance operations. This sparked fears about what other problems may still be lurking beneath the surface.

In response, its new management team plans to simplify the company, but many investors are worried that it won't be enough. As a result, GE stock has lost about half of its value over the past year.

GE Chart

General Electric stock performance. Data by YCharts.

GE's moribund stock performance could cause the company to lose its place in the Dow Jones Industrial Average. Tim Mullaney of MarketWatch recently suggested that Amazon.com (AMZN 3.15%) should replace it. Amazon is extremely unlikely to join the Dow, though. Among today's fast-rising companies, Facebook (META -0.76%) is the most likely Dow candidate.

The stock price is the problem

General Electric is the only one of the 12 original Dow components that is still part of the index. Thus, dropping GE from the Dow would be a momentous decision. However, the index committee may not have much choice anymore.

The problem is not that General Electric has suddenly become irrelevant. Analysts expect it to produce more than $120 billion of revenue this year. Even if the company slims down by selling or spinning off its interests in oil and gas, transportation, and lighting, it will still have about $100 billion of annual revenue. That puts it in the upper echelon, even within the Dow index. Among General Electric's main business segments, only GE Power is shrinking.

Instead, GE is likely to get booted from the Dow because of its low stock price. The Dow Jones Industrial Average is a price-weighted index, which means that low-priced stocks like GE -- which ended last week at $15.64 -- have a very low weight in the index. (By contrast, Boeing is the highest-priced Dow component, with a stock price of $348.91 as of Friday's close.)

A Boeing 777-300ER jet with GE engines

GE is likely to be replaced in the Dow by a higher-flying stock. Image source: Boeing.

Right now, General Electric stock makes up just 0.4% of the Dow index, compared to 9.4% for Boeing. In short, it has become virtually irrelevant to the index's performance -- as seen from the fact that the Dow has soared over the past year despite GE's woes. In the past, this has been sufficient cause for removing stocks from the Dow index.

Amazon.com stock is too pricey for the Dow

In terms of fundamentals, adding Amazon to the Dow would make a lot of sense. As Mullaney notes, it's a massive, fast-growing company that is quickly diversifying beyond its retail roots.

However, its sky-high stock price means that it won't be considered for inclusion in the Dow. Based on its Friday closing price of $1429.95, Amazon stock would make up nearly 28% of the index, completely dominating its performance.

Mullaney does recognize this obstacle, and suggests that Amazon could split its stock to put the stock price back in range for Dow inclusion. However, Amazon's last stock split was in 1999. It seems like management has made a philosophical decision to avoid the financial engineering of stock splits and let the stock price go where it will.

Facebook could be the best alternative

CVS Health was Mullaney's "backup" choice for inclusion in the Dow. It's already No. 7 on the Fortune 500 list of the largest companies by revenue, and will move up further if its proposed acquisition of Aetna is approved. As one of the leading healthcare companies in the U.S., it is likely to join the Dow index sooner or later.

However, if the selection committee wants to add one of the most prominent high-growth companies to the index, Facebook is the obvious choice.

First of all, the stock's Friday closing price of $190.28 puts it well within the price range of the other Dow components. Furthermore, Facebook has a massive global audience of billions of users across a handful of dominant apps. This gives it a huge amount of leverage with advertisers. Revenue zoomed past $40 billion last year -- up from just $18 billion two years earlier -- and analysts expect Facebook to generate about $70 billion of revenue in 2019.

There are plenty of good candidates for the Dow index if the committee dumps GE because of its slumping stock price. But among fast-growing internet stocks, Facebook is the logical choice.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

General Electric Company Stock Quote
General Electric Company
GE
$63.54 (-0.20%) $0.13
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$109.56 (3.15%) $3.35
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
META
$160.03 (-0.76%) $-1.22

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
311%
 
S&P 500 Returns
110%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.