In this article we discuss 10 biggest companies that were dropped from the Dow Jones Industrial Average (DJIA) index. You can skip our detailed discussion about the importance the Dow index and go directly to 5 Biggest Companies That Were Dropped From the Dow Jones Industrial Average (DJIA).
The Dow Jones Industrial Average (DJIA), often known as Dow Jones, or simply the Dow, is a stock market index that measures the stock performance of 30 companies listed on the stock exchanges in the U.S. The index was named after the American journalist Charles Dow, who co-founded Dow Jones & Company with Edward Jones and Charles Bergstresser. At the time of its inception, the Dow had 12 companies. S&P Dow Jones Indices LLC in 2012 acquired the Dow Jones Indexes. S&P Dow Jones Indices LLC is a joint venture between controlling member S&P Global and the CME Group. Charles Dow calculated simple average of the index by adding the prices of the twelve Dow component stocks and dividing by twelve. However, the Dow Divisor is now used to find out the effect of a one-point move in any 30 stocks.
Changes In DJIA: What's The Criteria?
The composition of the index keeps changing based on financial performance, relevancy, structure and other key factors. For example, over the last few years, the Dow is booting energy companies from the index and embracing technology and healthcare companies. When oil giant ExxonMobil was removed from the index last year, here’s what Raymond James’ Pavel Molchanov said about the decision:
“In removing Exxon from the DJIA, the index provider is clearly being reactive, and indeed accentuating the extremely negative investor sentiment on just about anything tied to oil and gas.”
The decision committee of the DJIA evaluates several factors before making a decision to remove or add companies to the index. Commenting on the index’s decision to remove Exxon and retain Chevron, Goldman Sachs’ Neil Mehta said that the index committee decided to keep Chevron because it has better FCF generation, stronger balance sheet and better operational and earnings execution.
The DJIA’s decisions to remove or add companies are often received with skepticism or criticism for a variety of reasons. Some also believe that the index is not an adequate representation of the market or U.S. economy as it consists of only 30 large-cap companies. Instead, the critics prefer broader indices like Russell 2000 or S&P 500 to gauge the situation of the economy.
Removal from the Dow Jones Industrial index is not a death-knell for a company. It’s just a sign that the company was not able to meet the standards of the index. Nicholas Colas, chief market strategist at Convergex, thinks that the Dow committee has a “habit of giving up” on companies at secular lows. “I have often thought that the Dow was as close to an actively managed portfolio as you can get. There is a huge scoop of human judgment when you try to whittle things down to 30 names.”
With this context in mind, let's take a look at the 10 biggest companies that were dropped from the Dow Jones Industrial Average (DJIA).
10. Bank of America Corp (NYSE: BAC)
Bank of America was replaced by Goldman Sachs in the Dow Jones index in the 2013 shakeup. In the fourth quarter, Bank of America saw signs of recovery, mainly due to an increased consumer spending, improving loan demand by commercial customers and investing activity. The bank reported EPS of $0.59, above the Street’s estimate of$0.59. Global markets revenue increased 14% to reach $3.91 billion.
As of the end of the third quarter, 88 hedge funds tracked by Insider Monkey held stakes in Bank of America, compared to 91 funds a quarter earlier.
9. Alcoa Corp (NYSE: AA)
Pittsburg, Pennsylvania-based producer of aluminum was booted from the Dow Jones index in 2013. The stock was replaced by Nike. Alcoa shares recently slid after the company gave weak forecasts for its bauxite and aluminum segments, mainly due to lower internal bauxite pricing and lukewarm earnings from minority owned mines. In the fourth quarter, the company beat analysts’ forecasts for earnings, while revenue came in-line with expectations.
As of the end of the September quarter, 33 hedge funds tracked by Insider Monkey were bullish on Alcoa.
8. HP Inc (NYSE: HPQ)
After nearly 16 years, HP was booted from the Dow Jones index, replaced by payments company Visa. HP is benefitting from the recent rise of PC shipments. In January, data from IDC showed that global PC shipments jumped 26% to 91.6 million units. Morgan Stanley recently maintained its Equal-Weight rating for HP stock and upped its price target to $26 from $22. Citi also increased its price target for HPQ to $23 from $18.50. The firm noted that the work from home trend will continue to help HP in the coming quarters.
Seth Klarman’s Baupost Group owns 13.3 million HPQ shares at the end of the third quarter. The total value of these shares is 252.57 million.
7. Kraft Heinz Co (NASDAQ: KHC)
Kraft is one of the 10 biggest companies that were dropped from the Dow Jones Industrial Average (DJIA), replaced by UnitedHealth Group Inc., after the company planned to spin off its North American grocery business. Kraft Heinz is one of the biggest food and beverage companies in the U.S. Kraft shares recently rallied on reports that it is in talks with Hormel (NYSE:HRL) to sell its Planters brand for around $3 billion.
Legendary investor Warren Buffett’s Berkshire Hathaway is one of the leading shareholders of Kraft. At the end of the third quarter, the hedge fund reported owning 325.64 million shares of the company. The total value of this stake is $9.75 billion.
6. General Electric Company (NYSE: GE)
After over 100 years on the index, General Electric was booted from the Dow in 2018. The company was replaced by Walgreens Boots Alliance. GE shares are down 12% over the last 12 months. However, the company’s transformation plans seem to be working. The company ended the fourth quarter with $4.4 billion in industrial free cash flow. In 2021, the company expects to generate FCF of $2.5 billion to $4.5 billion. In the fourth quarter, GE posted a non-GAAP EPS of $0.08, missing the consensus estimate by $0.01.
A total of 45 hedge funds tracked by Insider Monkey held stakes in General Electric at the end of the third quarter, down from 57 funds a quarter earlier.
Here's what Longleaf Partners Fund, a Memphis-based fund under Southeastern Asset Management, said about GE stock in their Q3 2020 Investor Letter:
“General Electric (GE) (-9%, -0.41%), the industrial conglomerate, was also a detractor in the quarter due to the slow recovery of the commercial aerospace industry, where monthly departures are improving but are still down 40% against last year. GE Aviation’s commercial engine and maintenance revenues have fallen by half, and the segment will not approach its 2019 profits for another few years. We have taken down our appraisal value to reflect this new reality. CEO Larry Culp has responded with necessary cost cuts and announced that consolidated GE will be cash profitable in the second half of this year and 2021. In Healthcare, where GE’s quarterly revenues fell 4%, scanning procedures and pharmaceutical diagnostics sales are recovering. GE Power, despite reporting -9% revenues for the quarter, has begun receiving significant new orders in natural gas and renewable energy equipment, while service sales rebound back near normal levels. We expect each one of GE’s segments to keep improving revenues and profitability over the next several years, helping the company to reach its target of high-single digit FCF margins. Today, the stock trades at less than half of our conservative appraisal value for this world-class collection of businesses.”
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Disclosure: None. 10 Biggest Companies That Were Dropped From the Dow Jones Industrial Average (DJIA) is originally published at Insider Monkey.