Inside the Dow: Apple

On Friday S&P Dow Jones Indices announced that Apple will be added to the Dow Jones Industrial Average after the market close on March 18th.

What’s in it for Apple

Apple was certainly well-known last week before the announcement that it will join the DJIA.  However, its entry into an exclusive club defined by The Dow, the oldest and most followed market measure, still confers more recognition. One comment on Seeking Alpha said Apple is now an adult.  There may not be a universal definition of what a Blue Chip stock is, but no one will argue now that Apple doesn’t qualify.  Much the same could be said for the other companies in the DJIA – any company joining The Dow is already an established leader with a history of success.

One thing that Apple isn’t likely to get by joining the Dow is a pop in its stock.  At times in the past companies being added to one of a few key indices saw their stock gain as index funds and ETFs tracking the index bought shares.  The “index effect” or “index pop” has been widely studied in the S&P 500®.   In recent years some stocks joining the S&P 500 experienced a temporary gain of 3%-6% which was given back over the next few months.  The funds tracking the S&P 500 are orders of magnitude greater than the approximately $30 billion tracking The Dow.  Not enough buying is likely to be generated to even briefly move a stock as large as Apple.

While there is no price or index effect, there is a “list effect” for both The Dow and the S&P 500. Apple is now on the list of Blue Chips — when a journalist wants to talk to a leading company or try to interview a famous CEO she will look at the list. The same is probably true of a Congressman seeking a campaign stop that will get him on the evening news or in someone’s Twitter feed.  One advantage of The Dow list  compared to the S&P 500 list is that the former isn’t likely to be used as a hunting ground for takeover targets.  More than half the exits from the S&P 500 are caused by companies being taken over, often by another company in the same index.

What’s in it for The Dow

The market changes, the economy shifts and the Dow changes as well.  Only one company, GE, of the current 30 is an original member from 1896, and it is very different today from what it was 119 years ago.  Adding Apple to The Dow is another change in a long list off entries and exits that keep the DJIA representative of current Blue Chips.  As long as the economy grows and the markets change, there will be more changes to The Dow.

The addition of Apple was supported by more suggestions, arguments and advice that it belongs in The Dow than most previous changes.  At the same time, it would have been quite difficult to add Apple if it hadn’t split its stock seven for one in June 2014. Whether one reason for the split to make Dow membership possible is a question for Apple, not S&P Dow Jones Indices.   We don’t discuss possible index changes with the companies affected or with anyone outside of the committee overseeing the particular index.

What About AT&T

The Dow has 30 members and adding one means removing another.  The decision to add, or remove, a stock from the The Dow (or any other index) is not an investment opinion. No buy/hold/sell.  The decision is based on what can make the index a better market measure.  There were two telecommunication companies in The Dow – AT&T and Verizon – and the decision on which to remove was based AT&T’s lower stock price. Since The Dow is price weighted, the lower a stock price, the less impact on the index.

An analysis in Seeking Alpha noted that stocks exiting from The Dow often do well. Just as being added to an index gets a stock noticed, being removed can also generate some investor interest.  Some investors believe that by the time a stock joins an index; its price has already risen while those leaving may be ready to rebound.

The posts on this blog are opinions, not advice. Please read our disclaimers.

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