S&P Dow Jones Indices, a subsidiary of S&P Global Inc. (SPGI, Financial), announced on Tuesday that Walgreens Boots Alliance Inc. (WBA, Financial) will replace General Electric Co. (GE, Financial) in the Dow Jones industrial average on June 26.
Brief overview of Dow Jones index
According to S&P Dow Jones, the Dow is a price-weighted measure of 30 U.S. blue-chip companies across all industries except transportation and utilities. Investopedia defines a price-weighted index as a stock index in which companies with a high share price outweigh those with a low share price. For example, the Dow weight for Apple Inc. (AAPL, Financial) would be higher than that of Coca-Cola Co. (KO, Financial) as Apple’s share price of $186.76 is approximately four times greater than the Coca-Cola’s share price of $43.57.
GE has low share price and profitability
S&P Dow Jones Managing Director David Blitzer said that GE’s share price of $12.89 would constitute less than 0.5% of the Dow, significantly low compared to other Dow components. Blitzer also said although GE was “an original member” in 1896, the U.S. economy has changed since then: The prominent sectors now include consumer discretionary, consumer staples, financial services, health care and technology.
The Boston-based company has net profit margins and returns that underperform over 86% of global competitors, suggesting low profitability and growth potential. GuruFocus ranks GE’s business predictability one star out of five and lists two red flags: The company’s operating and gross margins have declined 15.5% and 9.9% per year over the past five years.
Walgreens offers higher predictability and representation of the economy
Blitzer then said Walgreens would “contribute more meaningfully to the index” and help the Dow “better represent the U.S. market and economy.” Although the Deerfield, Illinois-based pharmaceutical retailer is part of the consumer staples sector, Walgreens also operates in health care.
GuruFocus ranks Walgreens’ business predictability five stars out of five as the company has consistent revenue and earnings growth. Walgreens’ three-year revenue growth rate of 11.50% outperforms 80% of global competitors. Additionally, the company’s three-year earnings growth rate is near a 10-year high of 23.60% and outperforms 76% of global competitors.
Walgreens stock rises on the Dow invite
Walgreens traded around $67.40 at 11 a.m., up approximately 4.31% from its previous close. On the other hand, GE traded around $12.80, 1.16% lower from its previous close.
Warren Buffett (Trades, Portfolio)’s market indicator increased to 145.4% even though the Dow closed approximately 280 points lower on Tuesday as fears of a U.S. – China trade war escalated following President Trump's threat to levy tariffs on $200 million Chinese goods on Monday according to CNBC.
Disclosure: no positions.
