The Dow Jones Industrials (DJINDICES:^DJI) had a fairly lackluster Wednesday, falling almost 13 points and giving back just a small portion of the gains the average has picked up over the past week and a half. Weak economic data and some earnings-related concerns held back the Dow from further gains. But the most interesting news for Dow investors came after the bell, when Apple (NASDAQ:AAPL) announced its latest earnings. Most investors focused on the after-hours gains for the iPhone maker, as it announced a higher dividend and a huge share buyback. But one much-overlooked element -- its planned stock split -- is the most important thing for those who follow the Dow Jones Industrials -- because at long last, Apple will no longer have any impediment to becoming a member of the Dow.
Top of the heap
Many investors have bemoaned the fact that Apple wasn't invited to join the Dow a lot sooner. The tech giant has the highest market cap in the stock market, and its size dwarfs some of the Dow's current and past tech components. Yet with share prices that went as high as $700 two years ago, it was impractical for Apple to become part of the price-weighted Dow Jones Industrials.
Now, though, Apple has announced a 7-for-1 stock split to take effect on June 9, with shareholders of record as of June 2 receiving six additional shares for each one they own. The move is somewhat surprising, as both former CEO Steve Jobs and current CEO Tim Cook had refused to split the stock before now even as the stock's price soared.
For the Dow, the net impact of the Apple split will be to bring its shares into a comfortable range between $75 and $85 based on after-hours trading. That price will put Apple squarely in the middle of the pack among Dow components, giving it a reasonable amount of weight but not too much -- and far less than some of its tech peers.
So if Apple does get invited to the Dow, which stock will have to leave? Given the number of tech stocks already in the Dow, it seems likely that it'll have to be a tech stock that goes -- and the two obvious candidates are Intel (NASDAQ:INTC) and Cisco Systems (NASDAQ:CSCO). Both stocks have relatively low share prices, making their impact on the Dow negligible. The last time the Dow chose to replace stocks, share price appeared to play a role, with low-priced stocks leaving to make room for higher-priced alternatives.
Intel was on top of the tech world when it joined the Dow in the late 1990s, but lately, it has lost most of its momentum. Only now has Intel made strides to regain its strength by coming up with a viable mobile strategy, and even so, Intel's heavy reliance on PC-driven revenue gives the Dow similar exposure to what it gets from including the maker of PC software like Windows and Office as a Dow component. Unless Intel dramatically changes its business model, one could argue that keeping Intel in the Dow duplicates what the average already gets elsewhere.
Cisco has seen a similar fall from grace, and its business model has already changed so dramatically that it no longer stands out as a distinctive Dow component. When Cisco's networking focus was paramount, the company was one-of-a-kind in the Dow. More recently, though, Cisco has tried to jump into popular areas like cloud computing and IT services -- areas that other Dow tech stocks are fighting in as well.
Obviously, the folks who manage the Dow Jones Industrials might not accept Apple's implicit application for membership. But for those who've long made the case for Apple to join the Dow, today's news could a groundbreaking event.