Google: The Next Dow Stock?

| About: Alphabet Inc. (GOOG)

About a month ago, the Dow Jones Industrial Average (NYSEARCA:DIA) made one of its biggest changes in recent memory swapping out three of the 30 index's stocks by adding Nike (NYSE:NKE), Goldman Sachs (NYSE:GS) and Visa (NYSE:V). As the third largest company by market cap some might contend that marquee tech names like Google (NASDAQ:GOOG) deserve a spot in the Dow more than the ones that were added and it's a fair argument.

The Dow, obviously, only considers companies that are representative of the overall economic landscape. Google currently generates more than $50 billion a year in revenue primarily through advertising via a variety of products like Google Search, Google+, Google Chrome, Android, the Chromebook and YouTube, and the company's ventures into hardware products like the Nexus mobile device and Google glasses provides the foundation for further revenue expansion opportunities. Considering the size and breadth of the company coupled with the fact that Google is the most visited website in the world, it's relevance in the consumer marketplace is well established.

You could make the argument that the technology sector as a whole is underrepresented in the Dow. IBM (NYSE:IBM) is currently the 2nd largest component of the index but after that you have to travel all the way down to Microsoft (NASDAQ:MSFT) at #25 on the list to find the next tech company. In fact, of the four technology components in the Dow, three currently reside in the bottom six of Dow weightings (Microsoft, Intel (NASDAQ:INTC) at #29 and Cisco Systems (NASDAQ:CSCO) at #30). Technology is only responsible for about 10% of the Dow but around 20% of the S&P 500 (NYSEARCA:SPY). The addition of a megacap like Google would certainly bring a relevant tech presence to the index.

However, perhaps the biggest factor working against Google is how the Dow Jones Industrial Average is calculated. Since the Dow is a price-weighted index, the one issue that would need to be addressed before a Google move to the Dow could be considered is the share price. Visa and its roughly $200 share price replaced IBM as the biggest component of the Dow when it moved into the index. Visa now comprises a little over 8% of the Dow. Should Google and its $1,000 share price move into the index it would carry over a 30% weighting. For that type of influence to be carried by just one company isn't appropriate for an index designed to be representative of the entire US market. Google would have to execute something in the order of a 5-to-1 stock split or higher to realistically be considered.


A stock split at Google is not unprecedented - sort of. While the stock has not made a traditional split the company did announce a new non-voting class of shares to existing shareholders in the first half of 2012, which essentially accomplished the same thing. However, the fact that the company has not split its stock since its 2004 IPO there's no real reason to think that it's going to split its stock any time soon.

Google doesn't seem terribly concerned with getting into the Dow either. It's probably getting more press attention as its stock price bounces around the $1,000 mark. Google may be a compelling investment based on the execution of its strategy but getting a bounce by joining the Dow Jones Industrial Average doesn't appear to be in the cards any time soon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.