Investors value the Dow Jones Industrials (DJINDICES:^DJI) for the quality of its selection process and its relative stability. Changes to the index like the one we saw earlier this week, in which the Dow Index Committee announced it would make three substitutions in the venerable index, are relatively rare.
But the question that often comes up with index changes is what happens to companies after they leave the Dow. The assumption most investors make is that their failure to remain in the Dow reflects an unpromising future that essentially dooms them to underperformance. That's clearly the case in some instances, such as when General Motors left the Dow just as it was entering bankruptcy proceedings that essentially wiped out existing shareholders.
Surprisingly, some former Dow components go on to reasonable levels of success. Let's take a look at some former Dow stocks to see how they've done outside the average.
The Dow and the Kraft breakup
Kraft Foods (UNKNOWN:KRFT.DL) was the most recent stock to leave the Dow, replaced last September when it separated from Mondelez International (NASDAQ:MDLZ). Kraft retained the company's slower-growth North American grocery business, while Mondelez took on the international snack business, which was seen as having greater potential.
Interestingly, the stocks have delivered the opposite performance that many expected. Since Kraft started trading separately on a when-issued basis in mid-September, its stock has returned 24%. Mondelez has done a bit worse, posting a 15% gain since early October after it completed the Kraft spinoff. But the Dow itself is up only 13% since mid-September and 14% since early October. Those Dow returns don't include dividends, so Mondelez has underperformed the Dow slightly, while Kraft has beaten the Dow by a substantial margin.
Citigroup survives GM's fate
In June 2009, Citigroup (NYSE:C) was kicked out of the Dow along with GM. Citigroup was still recovering from the financial crisis, with its shares trading for less than $3.50 on the day it was removed.
Subsequently, Citi did a 1-for-10 reverse split and started taking steps to shore up its capital condition. Progress has been slow-going at times, but Citi has done an impressive job of improving its balance sheet and getting itself back on track. The bank's stock has risen 48% since getting kicked out of the Dow. Yet even that reasonably strong gain pales in comparison to the Dow's 75% rise since then. Interestingly, none of the bank stocks in the Dow currently have managed to outpace the Dow's gains since mid-2009, although several outside the Dow have posted better returns.
Another reason Kraft was a good idea
Kraft also demonstrated its value to the Dow by helping it avoid at least some of the damage from AIG's (NYSE:AIG) presence in the average. Kraft replaced AIG in September 2008, after the insurance giant had already lost most of its value after receiving a massive government bailout.
Despite having suffered big losses, AIG continued to struggle for the rest of 2008 and into 2009, with the stock finally executing a 1-for-20 reverse split. The company started to sell off businesses and eventually averted collapse, repaying the government for its bailout and posting substantial gains from its worst levels. Nevertheless, even accounting for a distribution of warrants the company made, AIG has lost about 36% since its exit from the Dow, compared to the Dow's rise of nearly 40%.
A mixed bag
Just about the only conclusion you can make from these recent Dow exits is that each case has its own unique characteristics. As you evaluate the future prospects for the coming round of Dow evictees, make sure not to fall into the trap of assuming that they're doomed to failure -- or that they'll rebound spectacularly after they're out of the limelight.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends AIG and General Motors, owns shares of AIG and Citigroup, and has options on AIG. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.