GM Reverse Split Creates Problems for Dow Jones

Includes: AAPL, GM
by: Scott Rothbort

If the General Motors (NYSE:GM) 1 for 100 stock split becomes effective then the stock price would theoretically become 100 times its current value. This would not create an issue with the S&P 500 Index (SPX), which is market capitalization weighted. However the people over at Dow Jones, now owned by News Corp. (NASDAQ:NWS) have a predicament on their hands. The Dow Jones Industrial Average (DJIA or INDU) is a price weighted index. Each constituent stock is represented by one share, regardless of the stock price or market capitalization. Thus a higher priced stock like International Business Machines (NYSE:IBM) is nearly 10% of the index while a lower priced stock like Alcoa (NYSE:AA) is just 1%. If the “new” GM post-reverse split shares are 100 times the current price then the “new” GM shares would jump from the lowest weighted stock in the index to the highest weighted stock.

So what is Dow Jones to do for its grand old Industrials Index? First they could leave the status quo alone and just let GM and its newly inflated price dominate the index. That would be a disaster and the index would become even more irrelevant than it currently is. Second they could seize the opportunity to transform the index to a capitalization weighted index. I doubt that would happen. It would require teaching old dogs new tricks. Lastly, they could kick GM out of the index and add a more meaningful stock like Apple (NASDAQ:AAPL) which at a price of $130 and market cap of $117 billion is as worthy to dominate the index like IBM with its $137 billion market cap rather than GM with a dubious market cap of $1 billion. I think that the replacement strategy is most likely for the Dow Jones Industrials. Stay tuned index fans.

At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC was long shares of AAPL --- although positions can change at any time.