Why Amazon is replacing Walgreens Boots Alliance on the Dow Jones
Why Amazon is replacing Walgreens Boots Alliance on the Dow Jones
Next week, Amazon will join the Dow Jones Industrial Average. It’s taking Walgreens Boots Alliance’s spot on the thirty-stock index.
The Dow Jones Industrial Average involves a little bit of math and a little bit of mystery. It’s made up of 30 companies from the S&P 500. And here’s the mysterious part: “It’s not governed by quantitative rules,” said Hamish Preston who serves as head of U.S. Equities at S&P Dow Jones Indices.
He says what the Dow is governed by is a committee that decides which corporate giants best represent the U.S. economy, which is kind of subjective. But essentially, the committee considers company growth and investor interest. And it includes a mix of industries for balance.
Which gets us to the math part of this. The Dow is weighted by share price. So when Walmart executes an already announced stock split next week, its ranking in the Dow will drop. Preston says adding Amazon gives some weight back to the retail industry.
“These types of changes have happened throughout history. And it’s by design,” he said.
The original Dow had just 12 companies in industries like sugar, tobacco and leather. Since 1896, its components have changed 50-something times. It no longer includes Pfizer, AT&T and Kraft Foods. And James Angel, a finance professor at Georgetown, says household names like Alphabet have never made the Dow.
“They are rather hesitant to put in a very high flying stock because they don’t want to put in something at the peak of a bubble and then watch it pop,” said Angel.
It means that to get a spot in the Dow, a company has to innovate, re-innovate and stand the test of time.
“And so to be included in the index is a sign that you’ve made it. To be taken out is a sign that you’re no longer one of the cool kids,” he said.
Walgreens’ cool kid status didn’t last long. It was added to the Dow in 2018 when it pushed out General Electric.
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