Investors have been waiting for many months to learn what will become of chemical conglomerate DowDuPont’s (DWDP) position among the Dow 30 stocks - the 30 large U.S. companies that make up the Dow Jones Industrial Average (DJIA). DowDuPont was formed in September 2017 by the merger of two chemical giants: Dow Chemical and DuPont de neMours.
The catalyst for the upcoming excitement was DowDuPont’s 2017 announcement that the company plans to split into three companies: Dow Inc., DuPont and Corteva Agrisciences. With the first of the spinoffs fast approaching on April 1, a decision was imminent from S&P Dow Jones Indices LLC, which is the company that manages the Dow Jones and S&P stock market indexes.
There was no chance that the DJIA was going to keep all three of DowDuPont’s new companies within the famed market index. The question then became: will the governing body at S&P Dow Jones Indices decide to keep Dow or DuPont within the DJIA, or will they replace DowDuPont with a completely different company? DWDP is the only one of the 30 DJIA stocks that represents the materials sector. If a different company joins the DJIA, will it be from the materials sector, or a wildcard selection that really surprises Wall Street?
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The New Dow 30 Stocks
The announcement arrived this week, on March 26. DowDuPont will be removed from the Dow Jones Industrial Average prior to the market’s opening bell on April 2. In its place, Dow Inc. will join both the DJIA and the S&P 500 indexes, thereby bumping Brighthouse Financial, Inc. (BHF) out of the S&P 500.
The most recent previous change in the DJIA occurred in June 2018, when General Electric Co. (GE) was removed from the index and replaced by Walgreens Boots Alliance Inc. (WBA). GE had been a proud member of the DJIA for 111 uninterrupted years. Walgreens Boots Alliance is an international wholesaler and retailer of health, beauty and pharmaceutical products. Walgreens bought Europe’s Alliance Boots in December 2014.
A variety of factors contributed to the rather shocking removal of GE from the DJIA, including the index’s lower emphasis on manufacturing companies, GE’s struggling finances and its very low share price. The DJIA is a price-weighted index, meaning that a low-priced stock like GE cannot contribute meaningfully to the index’s value. By replacing GE with a much higher-priced stock, the value of the index can rise more than it would by continuing to hold any low-priced stock, whether that stock belonged to GE or a rapidly growing company.
WBA rose 5% upon news of its inclusion in the DJIA, followed by another 27% increase in the next six months, prior to getting slammed when the big stock market correction hit in December 2018. It remains to be seen whether Dow Inc. shares might imitate that huge run-up.
In December 2018, United Technologies (UTX) announced their intention to break up into three companies by 2020, consisting of their aerospace (Rockwell Collins and Pratt & Whitney), Otis elevator and Carrier air-conditioning divisions. United Technologies closed on the $30 billion purchase of aerospace company Rockwell Collins in November 2018. As with DowDuPont, the spinoffs will trigger another forced decision by S&P Dow Jones Indices.
United Technologies’ aerospace division will be the largest of its three companies after the breakup, and therefore the most likely spin-off stock to be chosen to replace UTX in the DJIA. However, unlike DowDuPont being the lone materials sector representative in the DJIA, the index already holds a significant aerospace company: Boeing (BA). Therefore, there’s no compelling reason for UTX to remain among the Dow 30. Investors now await news on whether UTX will be removed and replaced by an as-yet-unknown large company.
As we ponder which stock might replace UTX among the Dow 30, here are some considerations:
Dow 30 Stock Requirements
- Dow 30 stocks must be members of the S&P 500 index.
- Dow 30 stocks must be domiciled in the U.S.
- Dow 30 stocks cannot be classified in the transportation or utilities sectors.
- The Dow 30 committee prefers that the price of new Dow 30 stocks not be more than 10 times higher than the lowest-price Dow 30 stock. Currently, the highest-priced Dow 30 stock is Boeing (BA) at 370 and the lowest-priced stock is Pfizer (PFE) at 42. Therefore, if new stocks were added today, the potential share price range could be anywhere from 37 to 420.
- The Dow 30 committee prefers that new entrants pay a dividend.
It’ll be many months before we know the name of the lucky company that will join the blue-chip stocks in the DJIA. As news develops, I’ll continue to keep investors apprised in my growth and value stock publication, Cabot Undervalued Stocks Advisor. To read it, click here.
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