General Electric, which has been a component of the Dow Jones Industrial Average since Teddy Roosevelt was president in 1907, will be pulled out of the basket of 30 stocks next week. It’ll be replaced by ... Walgreens.
Why’d GE get bounced? It probably has something to do with the company’s fortunes. While it still generates a tremendous amount of revenue—$120 billion in 2017—its margins have fallen, and it swung into the red in each of the past two quarters. As a result, GE’s shares have fallen roughly 60 percent, from highs close to $32 per share at the end of 2016 down to today’s close at $12.88. Its shares performed the worst of any in the Dow last year.
The index is supposed to represent the country’s 30 biggest, best companies out of the more than 3,500 publicly listed corporations. The committee that oversees the index did not give a technical reason for the demotion. Instead, David Blitzer, the chairman of the index committee at S&P Dow Jones Indices, gave a more nuanced statement, referencing GE’s continuous inclusion since 1907.
Since then the U.S. economy has changed: Consumer, finance, health care, and technology companies are more prominent today and the relative importance of industrial companies is less. Walgreens is a national retail drugstore chain offering prescription and nonprescription drugs, related health services, and general goods. With its addition, the DJIA will be more representative of the consumer and health-care sectors of the U.S. economy. Today’s change to the DJIA will make the index a better measure of the economy and the stock market.
If you’re thinking, “That sounds kind of arbitrary,” you’re not wrong. How does adding up the share prices of 30 handpicked stocks and then dividing by a mutable “divisor” to normalize the index into a single number measure “the economy and the stock market”?