Apple joins the Dow later this month. Source: Apple.
The stock market gave up ground on Friday morning, as the U.S. labor market defied cold winter weather to produce more strong gains in jobs growth. Yet the big news of the day was that Apple (AAPL +1.50%) would replace AT&T (NYSE: T) in the Dow Jones Industrials (^DJI 0.14%) later this month. Even as investors reacted by sending Apple shares higher and AT&T stock lower, the telecom company's shareholders might well have the last laugh if historical trends hold true.
Jobs moved the market today
The Labor Department reported that the U.S. added 295,000 jobs in February. As a result, the unemployment rate fell to 5.5%, which is the lowest rate since 2008. While some of the drop in unemployment came from reduced labor force participation, investors now believe the Federal Reserve will act more swiftly to raise interest rates. That sent the Dow down by about 166 points as of 11:15 a.m. EST, while other major markets suffered less extreme losses.
Still, many investors focused on Apple's ascent to the Dow at the expense of AT&T. Apple shares climbed almost 2%, raising the tech giant's market cap to about $750 billion and cementing its place as the dominant company in the global stock market. By contrast, AT&T shares sank by roughly 1.7%, with the telecom pioneer's sensitivity to interest rates also likely playing a role in the decline.
Many people have expected Apple to join the Dow ever since the company split its shares 7-for-1 last year. By doing so, Apple's share price fell into the same range as the Dow's 30 components, making it easier for the price-weighted average to bring the tech stock into the fold. By contrast, AT&T has one of the lowest stock prices in the Dow, making its influence on the average minimal.
Source: AT&T.
Why AT&T could win
You'd think getting kicked out of the Dow would be a bad thing for a stock. When you look at history, though, many Dow rejects actually soar following their departure from the average.
For instance, the three most recently evicted Dow components have all produced positive returns since their departure, and two have performed quite well. Aluminum specialist Alcoa (AA +0.00%) had sunk to near-unimportance in the Dow, but the stock is up more than 75% since its September 2013 replacement. Hewlett-Packard (HPQ +0.85%) had already started to rebound from its slump when it was evicted from the index, but the stock has climbed another 60% in the interim, easily outpacing the Dow's 17% gain. Even Bank of America (BAC 1.85%), which hasn't seen stellar performance over the past couple years, has managed a 15% rise since getting kicked out of the Dow.
Apple might actually play a substantial role in driving AT&T's future success. The rise in demand for wireless services spurred by new electronic devices from Apple is a big part of why the mobile revolution has been so successful for wireless telecom companies. As AT&T moves forward with plans to expand and improve its wireless coverage, it will need Apple and other device manufacturers to keep delivering innovative new products that will bring even more customers into its network.
With AT&T having been set to celebrate its 100th anniversary in the Dow next year, the company must be reeling at the average's decision. Nevertheless, its shareholders might have cause to celebrate if past trends repeat.
