When it comes to history, virtually no index tops the Dow Jones Industrial Average (^DJI -0.77%). Despite its well-known flaws, the 122-year-old Dow is older than every other U.S. index, save for the Dow Jones Transportation Index, and Wall Street and investors alike look to it to provide insight into the health of the U.S. stock market and economy.
However, the Dow's 122 years of history hasn't been without change. Since its official launch on May 26, 1896, there have been more than 50 component changes in the Index. In fact, the original Dow contained just 12 companies. It was later expanded to 20 stocks on Oct. 4, 1916, and to 30 companies, as we have today, on Oct. 1, 1928. Some of these changes involved the exit of a single company from the Dow, with a new company replacing it. Other changes saw nearly half the index thrown out in favor of new components, as happened on April 1, 1901.
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Once a Dow stalwart, General Electric now finds itself in unfamiliar territory
Yet for as much change as the Dow has undergone in those 122 years, the closest thing it had to a constant was the tenure of General Electric (GE -1.04%). Conglomerate GE, despite bouncing in and out of the index in its early years, was one of the founding 12 stocks on May 26, 1896, and had been a permanent fixture in the index for more than 110 years... until a few weeks ago.
You see, in mid-June, the S&P Dow Jones Indeces committee responsible for overseeing the Dow's components and ensuring they're reflecting the U.S. economy, decided it was time to punt General Electric from America's most-watched stock index. Since the Dow is a price-weighted index, rather than a market-cap-weighted one, and since GE's stock had lost more than 60% of its value over the trailing two-year period, its impact on the Dow was laughably small compared to Boeing, which had a share price more than 25 times higher than General Electric.
On June 26, 2018, it became official, with General Electric booted from the Dow, and Walgreens Boots Alliance welcomed to the prestigious index.
Three Dow stocks with the best chance to be kicked out next
With the understanding that changes to the Dow are somewhat commonplace throughout history, you might be wondering what components could be the next to get the boot. While I do believe there's one exceptionally strong candidate, I do see the possibility for two other components to also be shown the door.
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Pfizer
The first of the aforementioned two components with a reasonable possibility of being booted from the Dow is Big Pharma giant Pfizer (PFE 0.23%). Keeping in mind that the Dow is a price-weighted index, Pfizer's current share price of just over $37 is the lowest in the index. Traditionally, the S&P Dow Jones Indices committee gets worried when the gap between the highest and lowest share price extends beyond 10-to-1. Right now the gap between Boeing and Pfizer is below this mark, but it's crept dangerously higher over the past year.
Even more so than just Pfizer's relatively low share price is that the company's management team has waffled on its corporate strategy for years. A few years ago, there was the belief that the company might spin off its established medicines business (i.e., drugs that've come off patent, or are near their patent expiration date), which never transpired. Then, just last week, Pfizer announced its intent to reorganize itself into three separate businesses: Innovative Medicines, which will contain biosimilars and a new hospital business unit, Established Medicines, and Consumer Healthcare. This is the same consumer healthcare division that Pfizer has been (unsuccessfully) trying to sell for months.
Given that Pfizer hasn't completely ruled out a spinoff of any of its divisions, or the sale of its Consumer Healthcare division, assuming it finds a price it can agree to, it's possible that, with Merck also representing the drug industry in the Dow, Pfizer could get the boot.
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American Express
A second Dow component that has a possible chance of expulsion on par with Pfizer is lender and payment services provider American Express (AXP -0.97%). Despite having almost 36 years of tenure in the Dow, and a healthy share price of $101, there's still reason to believe that American Express could be shown the door.
We have to remember that the S&P Dow Jones Indeces committee only has 30 "spots" in the Index to represent the American economy as best as possible. If American Express was the only payment services company in the Dow, we wouldn't be having this discussion. But in September 2013, the committee added Visa (V -0.70%) to the Dow, creating a bit of a redundancy in the index. With the exception that American Express acts as a lender and payment facilitator, and Visa focuses solely on being a payment facilitator, these are extremely similar businesses.
But here's the differentiating factor: market share. Even though the Dow 30 represents multinational businesses, the ultimate goal of the committee is to get the best snapshot possible of U.S. stock market and economic health. According to WalletHub, Visa maintained a 50.6% credit card market share in the U.S. in 2016, compared with just 22.9% for American Express, which was in second place. Visa also had more credit cards bearing its logo in circulation in the U.S. than competitors MasterCard, Discover Financial Services, and American Express, combined.
AmEx could find itself on the outside looking in if it runs into any further operational hiccups similar to what it experienced when it and Costco parted ways a few years ago.
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DowDuPont
But if there's one Dow component that looks to have an inside track to being punted out of the index, my money would be on chemicals giant DowDuPont (DD -0.79%), which recently completed a merger between Dow Chemical and longtime Dow component DuPont.
Despite having a reasonably high share price of $66, which shouldn't set off alarm bells as it did with General Electric and its $13 share price, DowDuPont has two factors working against it.
First, I'll turn to comments from David Blitzer, the managing director and chairman of the index committee at S&P Dow Jones Indeces. Said Blitzer, following GE's ouster, "The U.S. economy has changed: consumer, finance, healthcare, and technology companies are more prominent today, and the relative importance of industrial companies is less." DowDuPont doesn't really fit into any of these four categories, placing it among the industries that the committee is placing less emphasis on.
Second, and most important, despite recently completing its merger, DowDuPont is planning to split into three separate companies by the end of the first half of 2019. These three companies will focus on DowDuPont's three core operations: material sciences (to be known as "Dow"), agriculture (to be known as "Corteva Agriscience"), and specialty products (to be known as "DuPont"). When these spinoffs occur, the share price and overall importance of DowDuPont will diminish, which I suspect will punch its ticket out of the Dow by no later than fall 2019, if not sooner.
Now, we simply watch and wait to see if these predictions pan out.
