5 Stocks That Could Be Dumped from the Dow

Sometime this fall, perhaps in the next few weeks, the membership of the venerable Dow Jones Industrial Average may change for the second time in 2024.

The changes may have more to do with weeding out stocks that just aren’t pulling their weight than the latest hot stocks coming in. That said, the inclusion of the latest strong stocks is a boost, if only to give the 128-year-old Dow more relevance.

The Dow is up 10.3% this year, which sounds good. So does the four record closes in the last five trading days of August.

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But here’s the thing: The Standard & Poor’s 500 index rose 18.4%. The Nasdaq composite rose 18%. However, both peaked in mid-June.

Differentials are not new. In 2023, the Dow is up 13.7%, but the S&P 500 is up 24.3%. The Nasdaq rose 43.4% and the Nasdaq-100 rose 53.8%.

The clues are not the same

There is a reason for the dichotomy. What the Dow produces each day is constructed very differently from the S&P 500 or the Nasdaq. So the Dow results should be different.

However, for years the Dow and S&P 500 have more or less tracked each other. Nasdaq is different, mostly looking for fast growers.

The S&P 500 and Nasdaq are weighted by market capitalization. That means price based on shares outstanding. So the more valuable a company’s total shares are, the more influence it has on an index.

The top 10 S&P 500 stocks have a combined market capitalization of $16.2 trillion as of August 30, accounting for 34.2% of the S&P market capitalization.

How the Dow is different

The Dow is a price-weighted index. So the higher the price of a stock, the more influence it has on average. Right now, the most expensive Dow stock is UnitedHealth Group (UNH) at $590.20, followed by Goldman Sachs (GS) at $510.25 and Microsoft (MSFT) to $417.14. Apple (AAPL) it’s #11 on the list at $229.

It doesn’t make sense, you protest. Microsoft has a market capitalization of $3.1 trillion. Apple’s market cap is $3.48 trillion. United Health’s market cap is just $545 billion, not chump change, of course.

But that’s the point.

When Dow founder Charles Dow first published the index, it had just 12 stocks. The index was generated by summing stock prices and dividing by 12. The index has had 30 members since 1928.

Now, it’s more complicated. The closing prices are added together and the sum is divided by a divisor that is adjusted for splits, share buybacks, and the like. The current divisor is 0.15221633137872. You can find it on the Market Lab page on Barrons.com.

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If you want to find out how much effect a change in the Dow stock has on a given day, just divide the stock’s change by the divisor.

On Friday, the Dow closed up 228 points. Amazon (AMZN) Dow member since February 26, was the largest contributor; its 3.7 percent gain to $178.50 added about 41 points to the Dow. Microsoft, up about 1% on the day, added another 26 points.

4 Reasons Why the Dow Is So Different

In 1896, there was no measure to suggest where the markets were on any given day. Having that number would help sell the newspaper that partners Charles Dow, Edward Jones and Charles Bergstresser founded, The Wall Street Journal.

Charles Dow wanted his index to represent industrial America. To go with its rail-focused transportation index.

Selection standards were somewhat subjective in 1896 — and still are. A company must be based in the US and be in the S&P 500. It must be verifiably profitable and signal where the economy is headed. It should pay a dividend. It has to be, well, respectable. It cannot be a transport company or a utility. They have their own indexes.

When stocks are down, the Dow suffers less. Its members are generally more stable than the stock market in general.

The Dow is organized into nine economic sectors: energy, technology, consumer discretionary, consumer staples, financials, health care, communications services, materials and industrials.

Technology is the Dow’s largest sector. Members are Apple, Microsoft Intel, Cisco Systems (CSCO) IBM (IBM) and Salesforce (mRCC) ,

A committee of five decides Dow membership: two from The Wall Street Journal and three from S&P Global (SPGI) which manages the index.

If offered membership, companies rarely say “No”.

Charles Henry Dow, originator of the Dow Jones Industrial Average and co-founder of Dow Jones and Co.

Bettmann/Getty Images

Who could be on the chopping block

The primary reason for being removed from the Dow is overall performance. Pharmaceutical giant Walgreens Boots Alliance (WBA) he has struggled seriously for several years. That’s why Amazon replaced it in February.

One company that probably won’t show up is Chevron (CVX) the Dow’s only energy stock. Travel companies (TRV) is the only component of insurance.

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Here are five possible candidates for elimination:

• Intel (INTC) . The stock is down 56% this year. The highest closing price of $73.34 came in July 2000. It is struggling to find its footing in artificial intelligence.
• Boeing (nay) . Shares have fallen 33% this year amid management problems and reputational damage from two plane crashes and an exploding door at Alaska Airlines. (ALK) flight. Airbus gains market share.
• Dow Inc. (DOW) . The chemical maker is the smallest Dow stock by market capitalization, with a stagnant share price. It is also Dow’s only materials stock.
• Verizon Communications (SEE) . A slow growing telecommunications company.
• NIKE (NKE) the athletic equipment giant. The stock is down 23% this year.

Five possible replacement candidates:

• Nvidia (NVDA) now the third most valuable company in the US. Shares of the chip giant are up 141% this year.
• Eli Lilly (LLY) the pharmaceutical giant with a market capitalization of nearly $1 trillion. They should probably split their shares.
• TMobile (TMUS) . A fast growing mobile communications company. 42% growth from the end of 2022.
• Google parent alphabet (GOOGLE) or (GOOGLE) . The search giant.
• Costco Wholesale (COST) . The giant in wholesale stores, fierce competitor Walmart. Up 44% in 2023, the stock is up 35% this year. They should probably split their stock.

The simplest solution is under Nvidia or Alphabet for Intel.

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