Out With The Old, In With The New For The Dow Jones

In a sign of the times, three stalwarts quietly shuffled out of the benchmark Dow Jones Industrial Index yesterday to make way for three sprightly looking behemoths. It’s a watershed moment and one that will surely go down in finance history textbooks.

One of those leaving is ExxonMobil (NYSE: XOM) who has, in one form or another, been a member of the Dow since 1928. They would have rubbed shoulders and shared newspaper print with the likes of Bethlehem Steel and were already a well-established member by the time Coca-Cola (NYSE: KO) was added in 1932. The writing has been on the wall for some time for them and with shares trading at 2004 levels, many on Wall Street were simply counting down the days to their exit.

It’s a sad end for one of the biggest energy names in the world who claims direct descent from John D. Rockefeller’s Standard Oil. Replacing them we have Honeywell (NYSE: HON), a tech and manufacturing company founded only 36 years after Standard Oil. Performance matters more than prestige though, and Honeywell’s shares are up 60% in the past five years compared to Exxon’s -46%.

Internal Numbers Matter

Also joining Exxon on the way out are Pfizer (NYSE: PFE) and Raytheon Technologies (NYSE: RTX). While both of these stocks are performing better than Exxon, their shares have, at best, trended sideways for many years now. Even their internal numbers have been nothing to write home about.

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Take Pfizer for example, a $215 billion pharmaceutical giant. The most recent two earnings reports in July and April showed revenue contracting 11% and 8% year on year respectively. Sure, you might point to COVID but even their January report showed revenue shrinking 9% year on year. Amgen (NASDAQ: AMGN), who are seen as Pfizer’s replacement are the epitome of a well-performing pharma and have seen their shares rally 60% in the past five years compared to Pfizer’s paltry 11%. Amgen’s July earnings report even had their revenue growing 6% year on year.

Raytheon Technologies is a $95 billion aerospace and defense company that reported EPS of -$2.26 in July. While revenue in that report was up 26% year on year, it was still down 1% in May and only up 7% year on year in January’s report. Not exactly the kind of solid momentum you expect to see when the S&P 500 is at all-time highs at either end of that time period. On the other hand, the third and final new companies joining the index is Salesforce (NYSE: CRM) who only yesterday reported knock out earnings and revenue growth of 27% year on year. As we wrote last week, this isn’t a once-off for them either.

Structural Changes

There’s also structural changes to take into account. By adding Salesforce, the Dow is accepting that tech is the dominant industry in the 21st century and it’s important to continue reflecting that. As a price-weighted index, it will be losing a lot of exposure to tech with Apple’s (NASDAQ: AAPL) stock split so the addition of Salesforce helps bolster this.

Raytheon Technologies itself was previously a Dow component as United Technologies until they went through a huge merger with defense company Raytheon in the past year. With Boeing (NYSE: BA) already in the Dow, it’s probably overkill to have the world's two biggest aerospace companies in an index of 30 components.

While their pride may be dented momentarily, in the long run studies suggest that those exiting stage left shouldn’t expect to see too much downside as a result of leaving the Dow.

Still, Monday’s changes were the biggest in seven years for Wall Street’s longest-serving index. Looking at some of the remaining 27 who have been there for some time, it’s hard to see it being another seven years before there’s more updates.