Salesforce, Amgen, Honeywell to join Dow Jones Industrial Average

Yahoo Finance Video

August 25, 2020 at 10:07 AM

Yahoo Finance’s Emily McCormick joins The First Trade with Alexis Christoforous to discuss the major shuffle in the Dow Jones Industrial Average.

Video Transcript

ALEXIS CHRISTOFOROUS: Now, we have got some major changes coming to the Dow Jones Industrial average that we want to tell you about. Exxon Mobil, Pfizer, and Raytheon are out. They're going to be replaced by Salesforce, Amgen, and Honeywell. This is the biggest reshuffling we've seen for the Dow Jones Industrial average since 2013.

And Yahoo Finance's Emily McCormick has got the details for us. Good morning, Emily. First off, let's just start with why these changes and why now?

EMILY MCCORMICK: Absolutely, Alexis, so it's worth reiterating the changes that we are going to be seeing in the Dow at the end of this month. Salesforce replacing Exxon Mobil. Amgen replacing Pfizer. And Honeywell set to replace Raytheon Technologies.

Now these changes were prompted after Apple decided to do a four for one stock split. Because the Dow is a price weighed index, a lower per share price for Apple is set to reduce its weight in the overall index. That means that the Dow will receive less exposure to the information technology sector.

And so these changes are intended to rebalance that. Now Howard Silverblatt of S&P Global explained the impact of Apple stock split in a note earlier saying overall the Apple split alone will reduce the weighing of information technology from 27.6% down to 20.4%. After the split, Apple will decline to about 3.4% weighing in the Dow, down from their pre-split level of 12.2%.

Now, this will increase the weight of each of the other 29 stocks in the index by about 10%-- once we see this Apple stock split. Now, with the split, combined with the membership changes, Apple's position in the Dow will fall from number one to number 17.

We are going to see UnitedHealth Group become the most heavily weighed component in the Dow. Now, as mentioned, these changes are set to take effect before market open on Monday, August 31. All of the outgoing stocks, that's ExxonMobil, Pfizer, and Raytheon we're trading lower by more than 1% in premarket trading. Taking a look at those incoming stocks, Salesforce, Amgen, and Honeywell, each of those are up between 2% and 3%. Alexis.

ALEXIS CHRISTOFOROUS: Emily, talk to us a little bit about why these three particular companies were chosen to replace the outgoing companies in the Dow.

EMILY MCCORMICK: Absolutely. So a big part of this was particularly because Salesforce helps boost that Dow's exposure to the information technology sector in light of Apple stock split. So that rebalancing was a big factor here. One of the things I also want to mention is that Salesforce's replacement of Exxon Mobil is a historic one. Exxon Mobil had been the longest tenured member of the Dow since getting added in 1928 when it was still known at the time as Standard Oil of New Jersey.

And, incidentally, when we take a look at Honeywell, one of the incoming stocks, that previously had been a Dow component and was first added in 1925 and then was removed in early 2008. Then taking a look here, we are also seeing the outgoing Exxon Mobil, Pfizer, and Raytheon each trading below $100 per share. So the fact that these share prices are on the lower side did have something to do with it as well, if we think about this being a price weighted index.

And then taking a look at Salesforce, Honeywell, and Amgen, these are each all trading comfortably above $150 to $200 per share. So something that's also going to impact the price movements and the weighings of these various stocks. Alexis.

BRIAN SOZZI: Emily, you really get the sense that over the next couple months there could be more changes like this. Keep in mind, we're still waiting to see if Tesla finally makes it into the S&P 500.

EMILY MCCORMICK: Well, that's something to definitely continue to watch for, Brian. Particularly, Tesla's S&P 500 inclusion potentially coming. When we take a look here at the change that we're seeing in the Dow though, something that could potentially narrow this riff that we're seeing in performance between the S&P 500 and the Dow, we do have the S&P up 6.2% for the year to date. The Dow is still down, about 8/10 of a percent.

Part of that being because the Dow hadn't been as exposed to these big tech companies, which had led the broader market higher. So with this rebalancing, something that could potentially narrow this rift.

ALEXIS CHRISTOFOROUS: Yeah, Emily, seems like it's out with energy, in with the cloud. Certainly, a sign of the times for those changes in the Dow. Emily McCormick, thank you.

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