The Dow Jones Industrial Average (DJIA) is widely regarded as the barometer of blue chip stocks and becoming a part of the DJIA is a validation for any publicly listed company. But, Amazon, which has been public for nearly 20 years and has forced a number of industries to evolve or face extinction, has yet to gain acceptance into the index. But Amazon is not alone in its absence in the Dow. The rest of the FANG group – Facebook, Netflix and Google, have also been left out of the index that is filled with old school companies such as DuPont, GE, Intel, J&J, P&G and Verizon among others. For more on FANG stocks, pl read our report on “Showing Your Fangs” at https://futurewealthllc.com/
There are two big reasons the Dow’s keepers have likely shunned the FANG stocks that make up 50% of the Nasdaq 100 by market capitalization.
Firstly, the stock price matters. The Dow is different from other indexes, because it is price weighted while the S&P 500 and the Nasdaq are market capitalization weighted. That means the higher the share price, the more influence it has on the Dow’s price. So the Dow committee looks for ratio of highest to lowest price be less than 10 to 1, which means a stock should be no more than 10 times the lowest priced stock in the Dow – General Electric (GE) at $29. As such, Amazon and Google which are in the $900 range, would have to conduct multiple stock splits to gain admission. Case in point, Apple gained entry into the Dow only after its 7 for 1 split in 2014.
Secondly, non-dividend payers need not apply. The membership committee doesn’t require a dividend, but companies that don’t pay them, don’t get the nod. Every current Dow component pays a dividend, with the implied dividend yield ranging from a low of 0.7% for Visa Inc. (V) to a high of 5% for Verizon Communications Inc. (VZ). With none of the FANG stocks inclined to pay a dividend as they more are likely to plow the earnings back into the company for future growth, it is fair to say that we will not be seeing these names in the DJIA anytime soon.
Future Wealth’s View
As much as we would like to see the FANG group in the Dow, if only to bolster the technology presence which is now only represented by Apple, Cisco, Microsoft, Intel and IBM, we believe the DJIA is running the risk of becoming irrelevant when compared to the S&P 500. Besides, entry into the Dow appears to be turning cutting edge growth companies into staid, old school underperforming blue chip companies – Nike and Intel come to mind.
The Dow’s recent underperformance while the S&P 500 index and the Nasdaq Composite Index have run up higher suggests to us that avoiding the Dow stocks for growth oriented investors and instead looking at them as a value play for more conservative investors is likely the best course of action.
Then there is the Dow Curse. Companies that have exited the Dow appear to have performed better afterward. Alcoa, GM, Citigroup among others have turned in better returns since getting booted out of the DJIA. But one would be ill-advised to use this theory as a long term strategy for their investments.