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GE may be out of the elite 30-stock Dow

2017-11-13 3 ℃

IT is hard to imagine the Dow Jones Industrial Average without General Electric Co. The US industrial conglomerate’s stock is the lone original component of the venerable blue-chip index that debuted in 1896.

But GE's dwindling share price and the likelihood that its new chief executive will dramatically slim down its sprawling operations is leading some index-watchers to consider the possibility of the company losing its membership in the elite 30-stock Dow.

“Since it is trading at a low share price and has a small weighting in the index, that does put it at an increased risk of getting removed,” said Alex Bryan, director of passive strategies research at Morningstar in Chicago. “I don’t think it’s obvious that it is going to be removed from the index, but it certainly is at risk.”

GE’s shares last week closed under US$20 for the first time in more than five years, its struggles made clear by a disappointing third-quarter earnings report last month. The stock closed at US$20.49 on Friday, marking a 35 percent decline in 2017.

The stock price is now the lowest among Dow members. Because the Dow is a price-weighted index, unlike the benchmark S&P 500 which is influenced by the market values of its constituents, that means GE has the least impact on the Dow's daily swings.

As of Friday, GE’s weight stood at only 0.6 percent. By comparison, aircraft maker Boeing Co, whose stock is above US$260, has a 7.7 percent weight.

Changes to the Dow are made on an as-needed basis and selection is not governed by quantitative rules, according to published methodology for the index.

A spokesman for S&P Dow Jones Indices said the committee that oversees the Dow index meets regularly and that its discussions are confidential. GE declined to comment.

Ivan Cajic, vice president for index and ETF research for ITG, said if the Dow were to make a change in the near future, GE is the likeliest to be removed.

“I wouldn’t be surprised if the company is safe for the time being and Dow Jones adopts a wait-and-see approach over the next few months to see how both the stock price and what the overall company look like in the coming months,” Cajic said.

GE’s fate as a Dow component may become clearer today when CEO John Flannery, who took the helm on August 1, is expected to detail the businesses the company plans to exit as it seeks to revive its financial prospects.

If GE starts selling big parts of its operation, the committee overseeing the Dow “would give serious thought to whether or not the new GE, (excluding) those businesses, still represents as much a part of the economy as they once had,” said Dave Nadig, CEO of ETF.com.

“If they continue to spin off and restructure businesses, they are going to just shrink,” said Chuck Carlson, a contributing editor.