All good things must come to an end eventually, and the swan song has come for what has been the longest-tenured stock in the Dow Jones Industrial Average (DJINDICES:^DJI), General Electric (NYSE:GE).
Despite more than 50 changes in the Dow's components since its inception more than 122 years ago, General Electric has survived most of them. It was briefly booted from the Dow in favor of U.S. Rubber all the way back in September 1898, only to return in April of the following year. It again was kicked to the curb on April 1, 1901, and remained out of the Dow until Nov. 7, 1907. However, of the 41 changes to the Dow's components since this date, more than 110 years ago, GE has remained a fixture.
So long, General Electric
But beginning June 26, 2018, this 110-year-plus streak will come to an end. As announced after the closing bell on Tuesday, June 19, by S&P Dow Jones Indeces, General Electric will be removed and replaced by Walgreens Boots Alliance (NASDAQ:WBA). Walgreens is a giant in the pharmacy space and a smart add by the committee given an aging U.S. population.
Said David Blitzer, Managing Director and Chairman of the index committee at S&P Dow Jones Indeces, "The U.S. economy has changed: consumer, finance, healthcare and technology companies are more prominent today and the relative importance of industrial companies is less."
It's certainly hard to argue with Blitzer's analysis considering what a poor showing GE has had of late. Shares of the conglomerate have fallen by more than 60% since July 2016, and shareholders have endured multiple profit forecast reductions, as well as a halving of its dividend in November of last year. Despite reorganizing its business to focus on three core segments -- aviation, power, and healthcare -- it's going to take time for the company to exit its other operations, as well as turn around the segments it's keeping.
As of Tuesday's close, a share of General Electric was going for just $12.95, and it was down another 2% in after-hours trading following the news that it was being given the boot from the Dow. Meanwhile, Boeing, the Dow stock with the highest share price, closed at $341.12. Since the Dow is a price-weighted, not market-cap-weighted index, this meant Boeing had roughly 26 times the influence on the Dow Jones Industrial Average as GE, and generally speaking, the index committee doesn't like when the high-versus-low ratio in terms of share price gets this large.
In other words, the writing was on the wall that GE was going to be shown the door.
The new longest-tenured Dow stock
So, with General Electric out, you might be wondering which stock is next in line in terms of seniority. That would be none other than integrated oil and gas giant ExxonMobil (NYSE:XOM), which will be celebrating its 90th anniversary in the Dow when Oct. 1 rolls around.
ExxonMobil joined the Dow back on Oct. 1, 1928, when the index was expanded from 20 components to 30 components (originally, when debuted in May 1896, it had just 12 components, of which GE was one). Of course, it didn't have the company name we now know. It was then known as the Standard Oil Co. of New Jersey. In 1972, the company changed its name to Exxon, and when it merged with Mobil in 1999, it became the mammoth oil and gas company we're familiar with today.
Unlike General Electric, which had been teetering for a while, ExxonMobil is in virtually no danger of giving up its seat in the Dow Jones Industrial Average. It sports a healthy $80.70 share price and is the ninth-largest publicly traded company by market cap in the U.S., assuming you count both share classes of Alphabet and Berkshire Hathaway as one.
It also ended 2017 with a not-so-shabby 21.2 billion oil-equivalent barrels of proved reserves, adding 2.7 billion oil-equivalent barrels to its reserves last year, ultimately replacing 183% of its 2017 production. Barring an unforeseen issue with the company, or a precipitous and lengthy decline in oil and natural gas prices, ExxonMobil is likely to remain a fixture in the Dow.
A word to the wise
With General Electric being removed next week, and Walgreens Boots Alliance being shown the red carpet, the Dow divisor, which determines what each $1 in share price equates to in Dow points, will again need to be adjusted. But, even following the addition of Walgreens and an adjustment to the Dow divisor, the same flaw with the world's most iconic stock index will remain: its reliance on share price instead of market cap.
As noted, the Dow is a price-weighted index, meaning companies with a higher share price have more influence over those stocks with a smaller number of outstanding shares, regardless of market cap. Boeing has nearly 10 times the impact on the Dow as drug giant Pfizer, which has a share price of $36.22, as of June 18. Yet, Pfizer's market cap is about $15 billion larger than Boeing's. This makes no sense.
In short, the Dow has really become nothing more than a novelty index that's overstayed its welcome. It's full of history and packed with companies that have time-tested business models. What it's not is an accurate portrayal of the U.S. economy or the health of American business. Thus, even with this upcoming change, the Dow should still be an index the retail investor mostly ignores.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares) and Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.