Of the 12 stocks that originally made up the Dow Jones Industrial Average in 1896, only General Electric remains part of the index.
As of next week, that will change.
GE will exit the Dow Industrial, to be replaced by Walgreens. The S&P Dow Jones Indices, the joint venture that maintains the stock index, took investors by surprise in announcing the change after the markets closed Tuesday.
The move not only underscores the challenges that GE has faced in recent years but illustrates the changing nature of the companies that are driving the U.S. Economy. In the past decade, tech and consumer-brand giants like Apple and Nike have entered the Dow, along with industry leaders such as Visa and UnitedHealth Group.
A sobering illustration to corporate America of how the fortunes of even the dominant firms can change. (True also for individuals and governments). Just ask yourself, who 10 years ago, would have thought this likely? Once-unthinkable, this has become a reality. @generalelectri pic.twitter.com/jVSPAQ2jpa
— Mohamed A. El-Erian (@elerianm) June 19, 2018
Among the other originals to the first industrial index compiled by Charles Dow in 1896 were companies that few recall these days, but which offer a snapshot of the economy at the time: U.S. Leather Company, American Tobacco Company, the Distilling & Cattle Feeding Company.
After GE exits the Dow, the component stock with the longest continuous history will be ExxonMobil, which entered the stock index in 1928 as Standard Oil of New Jersey.
During the past two years, GE’s shares have fallen 57% as of Tuesday’s market close, while the Dow Jones Industrial Average has risen 44%. Facing a series of financial setbacks, GE’s new CEO John Flannery has instituted a number of cost-cutting actions that have led to thousands of layoffs and cut in half the dividends it pays to shareholders.
Walgreens—or Walgreens Boots Alliance, as the stock is formally called—has declined 22% in the past two years. But the committee overseeing the Dow’s composition felt its inclusion in the index better reflected the dynamics of the U.S. Economy.
“Walgreens is a national retail drug store chain offering prescription and non-prescription drugs, related health services and general goods,” David Blitzer, a managing director at S&P Dow Jones Indices said in a statement. “With its addition, the DJIA will be more representative of the consumer and health care sectors of the U.S. Economy. Today’s change to the DJIA will make the index a better measure of the economy and the stock market.”
Changes in the compositions of stock indexes can sometimes cause departing stocks to fall and incoming issues to rise. In after-hours trading Tuesday, shares of GE were down 1.4%, while shares of Walgreens were up 2.9%.
In February, GE’s Flannery cautioned investors who were giving up on the stock to “do so at their own peril.” In a letter to shareholders, Flannery acknowledged his difficult first year leading the conglomerate before asserting, “Many people have lost faith in us. I have not.”
But now the Dow indices, it seems, have done so.
