Don’t cry for 3 Dow Jones leavers; stocks tend to hold up

Aug. 25, 2020 12:11 PM ETExxon Mobil Corporation (XOM), RTX, PFEBA, BAC, AMGN, AA, XOM, PFE, MRK, HON, WBA, RTXBy: Kim Khan, SA News Editor66 Comments
  • Being replaced in the Dow may just amount to a bruised ego.

Exxon Mobil (XOM-2.9%), Raytheon (RTX-3.1%) and Pfizer (PFE-1.6%) are all struggling today as the stocks were shown the door from the Dow Jones Industrial Average.

The general thinking is that the stocks will lose the support of money indexed or benchmarked to the Dow. It’s more likely just a knee-jerk reaction to a negative headline, though. Yes, there is $28B indexed to the Dow 30. But there’s $11.2T indexed and benchmarked to the S&P, with index funds making up $4.6T.

In fact, the effect of losing Dow status may just be hurt pride. Looking further down the road, getting jettisoned from the index doesn’t seem to have much impact on shares.

Of the 17 stocks that have been removed from the Dow since 1999, the average one-year performance is down less than 1%, according to WSJ Market Data Group calculated in mid-2018.

The last big Dow reshuffle in 2013 saw Alcoa (AA-1.5%), Bank of America (BAC+0.8%) and Hewlett-Packard leave. A year later, Alcoa was up 96%, BofA was up 17% and HP was up 73%.

How did Exxon, Pfizer and Raytheon get the boot? The main reason is that S&P Dow Jones Indices wants to pivot the index more to tech and it would be losing a lot of that exposure after Apple’s stock split, since the Dow is a price-weighted index.

Exxon has been a member of the index since 1928. But over the last 10 years, Exxon is down 28.4%, compared with fellow Dow member Chevron, up 18.2%. Looking at total return, Exxon is up just 2.3%, with Chevron up 73.7%.

Pfizer has performed about the same as fellow component Merck (MRK-0.1%) in the last 10 years, both up about 250%. Replacement Amgen (AMGN+4%) is up 466%. But in the last five years, Merck, up 94%, has nearly doubled the performance of Pfizer, up 49%.

Raytheon is simply not the company is was when it was just United Technologies, with much more aerospace exposure, already featuring in the index with Boeing (BA-2.8%). Honeywell (HON+3%), ousted in 2008, brings back more of the pure industrial business.

Investors should perhaps be more concerned about the shares of new entries. According to the same data cited earlier, the 17 new entrants since 1999 fell 8% on average a year after their Dow debut. 

Walgreens (WBA-1.4%) is down 42% since it entered the index in 2018.

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