This was a momentous year for the Dow Jones Industrials (^DJI -0.11%), which saw the historically stable index replace three of its members. As rare as major Dow moves are, though, there's a good case to kick out as many as three more Dow components in the near future. Among those most likely to see the exit door in my view are DuPont (DD), American Express (AXP 0.07%), and Merck (MRK 0.10%), assuming the right combination of events plays out.
Image source: Wikimedia Commons.
The case showing these stocks the door
For DuPont, the most likely scenario for a Dow exit would involve the chemical giant's complete divestiture of its old-economy businesses. Already, the company has taken great strides toward narrowing its focus on high-margin agricultural products, with its acquisition of Pannar Seed in South Africa opening up a lucrative new market for the company. DuPont has also made plans to spin off its performance chemicals business, with the company giving itself a roughly 18-month timeframe to make the move. Moreover, with cross-licensing agreements with most of its major rivals, DuPont looks well-positioned to take its share of the growing worldwide market for yield-enhancing crop traits that can help farmers respond better to changing weather and growing conditions. The question for DuPont's continued Dow viability is whether it makes enough additional acquisition to boost its ag business to keep up its overall revenue and justify its continued membership among the Dow 30.
For years, American Express made sense as a Dow component because of its then-unique exposure to the credit card industry. Other Dow components issued credit cards, but none had its own card network that worked with merchants to facilitate electronic transactions. Yet that all changed when Visa (V 0.33%) entered the Dow, in a move that brought the industry's behemoth into the average. Although American Express does have a travel business that gives it some distinctive characteristics compared to other financial stocks, its primary card segment is covered by Visa and JPMorgan Chase, whose Chase division is among the biggest issuers of credit cards in the world.
Merck is the smallest of the three companies with pharmaceutical operations in the Dow, although it still has a hefty market capitalization above $140 billion. What could potentially knock Merck out of the Dow, though, is choosing to follow the lead of some other major pharma companies by spinning off a major portion of its operations into a separately traded company. Speculation about a possible restructuring for Merck has swirled for some time, with many pointing to the success of Abbott Labs and Pfizer in making similar moves recently. Merck has an animal-health business of its own that it could spin off, and separating its consumer-health division could also help Merck put all its attention toward its drug business. Yet Merck remains reluctant to change its overall business structure, and without such a change, it's unlikely that the Dow would move to take out the pharma giant. Moreover, even if Merck does make such a move, the relative contribution of those smaller businesses is minimal enough that the Dow might decide to let Merck stay in the Dow -- just as Pfizer got to remain in the average even after its spinoff.
It's still a long shot
These three stocks might have the highest change of getting removed from the Dow in 2014, but those odds aren't terribly high. With the Dow having made a major shift this year, the Dow's decision-makers would likely have to get forced into making an additional move by major corporate decisions by these three companies before they'd replace them in the coming year.
