Before the market opens on Monday, Aug. 31, the 30-stock Dow Jones Industrial Average will be replacing Exxon Mobil (XOM, Financial), Pfizer (PFE, Financial) and Raytheon Technologies (RTX, Financial) with Salesforce.com (CRM, Financial), Amgen (AMGN, Financial) and Honeywell International (HON, Financial) in a major shakeup for the index.
According to a statement by Dow Jones Indices, the changes "help diversify the index by removing overlap between companies of similar scope and adding new types of businesses that better reflect the American economy."
Such a big change is unusual for the index, as Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, told CNBC in an interview about the topic. The last time three Dow stocks were replaced at once was in 2013, when Alcoa (AA, Financial), Bank of America (BAC, Financial) and Hewlett-Packard (HPQ, Financial) were booted off and replaced with Goldman Sachs (GS, Financial), Nike (NKE, Financial) and Visa (V, Financial).
Why the shakeup?
Unlike the S&P 500, which is based on market cap, the weighting of the stocks that make up the Dow depends on share price. Apple's (AAPL, Financial) stock split thus dropped it from the most influential company in the index to the 17th most influential. Once the new changes go into effect, Amgen will be third on the index, with Salesforce coming in sixth and Honeywell 11th. UnitedHealth Group (UNH) will become the most heavily weighted component.
The changes seem to have been largely prompted by Apple's four-for-one stock split, which will go into place on Aug. 28, but that doesn't fully account for the change, as Salesforce is the only tech company replacing a non-tech company. Silverblatt noted:
"Basically Apple — by itself — took the technology [weighting] within the Dow down from 27.6% to 20.3%. It's a significant decline. By adding Salesforce, you can come back to 23.1% of the Dow being in technology."
The 30-stock index aims to reflect the overall American economy. While this is by no means an exact science, some analysts seem to disagree with the 4.5% reduction in tech exposure that all of the above changes will bring about, speculating that with less Apple to do the heavy-lifting, the index will continue to underperform the Nasdaq and the S&P 500.
Salesforce to replace Exxon Mobil
What seems to have surprised Wall Street the most is the exclusion of Exxon Mobil from the index. The oil giant, which will be replaced with subscription-based customer management software provider Salesforce, is one of the top players in the struggling oil and gas industry. The Dow Jones Indices team's decision to replace it could indicate that they expect the energy sector, or at least the oil and gas sector, to make up a smaller portion of industrial production in the long term.
Shares of Salesforce are up approximately 4% to trade around $216.95 on Aug. 25 following the announcement of its coming inclusion in the Dow.
GuruFocus gives Salesforce a financial strength rating of 7 out of 10 and a profitability rating of 5 out of 10. The Altman Z-Score of 6.36 indicates that the company is safe from bankruptcy. The three-year revenue growth rate is 18.6%, while the three-year earnings per share without non-recurring items growth rate is -31.2%.
Amgen to replace Pfizer
The switch from Pfizer to Amgen is trading a more traditional drug manufacturer for a biotech drug manufacturer, but Amgen's share price is approximately six times that of Pfizer, which will result in an overall increased weighting of the sector. Additionally, while Pfizer has had a tough year as one of the Dow's worst-performing stocks, Amgen has gained 25% over the past year.
Shares of Amgen are up approximately 5% to trade around $248.27 on Aug. 25 following the announcement of its coming inclusion in the Dow.
GuruFocus gives Amgen a financial strength rating of 4 out of 10 and a profitability rating of 9 out of 10. The Altman Z-Score of 2.18 indicates that the company is not likely to face bankruptcy in the next two years. The three-year growth rate of 8% and three-year EPS without NRI growth rate of 7.9% are outperforming 53% of industry peers.
Guru owners of the stock include Primecap management with 17,962,930 shares, Jim Simons (Trades, Portfolio)' Renaissance Technologies with 1,611,614 shares and Pioneer Investments (Trades, Portfolio) with 1,155,552 shares.
Honeywell to replace Raytheon
Raytheon Technology's stock has had a notoriously bad run after United Technologies and Raytheon merged to form the aerospace and defense giant, spinning off most of the businesses that were not related to this industry in the process (such as elevator division Otis (OTIS) and HVAC division Carrier (CARR)). While Honeywell also has some aerospace operations, it is a more diversified industrial products company, with operations in building technologies, performance materials and technologies and safety and productivity solutions.
Shares of Honeywell are up approximately 5% to trade around $164.53 on Aug. 25 following the announcement of its coming inclusion in the Dow.
GuruFocus gives Honeywell a financial strength rating of 6 out of 10 and a profitability rating of 8 out of 10. The Altman Z-Score of 3.47 represents solid financial stability. The three-year revenue growth rate is -0.3%, contrasting the three-year EPS without NRI growth rate of 10.6%.
Mairs and Power (Trades, Portfolio) is the biggest guru shareholder of the company with 1,203,638 shares, followed by Pioneer Investments with 1,176,802 shares and Diamond Hill Capital (Trades, Portfolio) with 1,140,977 shares.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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