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Amazon To Join Dow Jones Industrial Average: Does Venerable Index Membership Still Matter?

Author: Neil Dennis | February 21, 2024 11:08am

Amazon Inc (NASDAQ:AMZN) is set to join the Dow Jones Industrial Average (DJIA) on Monday, Feb. 26.

The Seattle-based e-commerce giant is replacing pharmacy company Walgreens Boots Alliance Inc (NASDAQ:WBA). In recent years, Walgreens has seen its shares plummet 28.4% in 2022; 30.1% in 2023; and 14.6% in 2024.

Amazon stock tumbled 51% in 2022 but came roaring back more than 100% since the beginning of 2023. Now it’s on deck to join DJIA — the so-called “venerable index.”

As one of Wall Street’s oldest stock indicators, the DJIA doesn’t get shaken up often. The last member to join was Walgreens in 2018 when it replaced General Electric, which enjoyed a 111-year tenure. Still, membership carries a certain prestige. Or does it?

“I remember when this would have mattered,” Scott Nations, founder of Nations Indexes, said on social media following the announcement.

So, does membership of this elite club still matter?

Also Read: Amazon Replacing Walgreens In Dow Jones Industrial Might Not Be A Great Thing – ‘Will History Repeat Itself?’

To be selected, companies have to meet certain criteria in terms of financial health and stability, liquidity, industry leadership and relevance to the economy, among others.

It’s fair to say, then, that even though companies are not included purely on market cap — as are indexes such as the S&P 500 — there must be a nod toward size and scale of operations.

Another is its visibility. The Dow is usually listed first among the U.S. stock indexes in financial media, and it is followed by a broad range of investors and included in index-tracking funds such as the SPDR Dow Jones Industrial Average ETF Trust (NYSE:DIA).

If the index components are not selected on market cap, why Amazon? See the chart below.

Consumer Retail Or Big Tech?

“Reflecting the evolving nature of the American economy, this change will increase consumer retail exposure as well as other business areas in the DJIA,” the S&P Dow Jones Indices said in the announcement.

The move was prompted by retailer Walmart‘s (NYSE:WMT) decision to conduct a 3:1 stock split. This reduced the retailer’s share price and weighting on the index, but Walmart remains a member.

But Amazon’s entry brings new opportunity — or risk — depending on how stocks perform in the coming months.

It now joins Apple Inc (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT) — fellow members of the prestigious Magnificent 7 technology giants — along with other tech heavyweights IBM (NYSE:IBM), Cisco Systems Inc (NASDAQ:CSCO) and Intel Corporation (NASDAQ:INTC).

Just look what the Magnificent 7 did for the S&P 500 last year. The Mag7 stocks were responsible for more than half of the S&P 500’s 24% gain over 2023. Taken together, they climbed 75% while the other 493 stocks managed just a 12% rally.

Plus, the Dow doesn’t hold Tesla Inc (NASDAQ:TSLA) which has fallen 22% in 2024, subtracting from the Mag7’s gains this year.

It’s arguable, then, whether Amazon should be a member of the Dow Industrials or better for the Dow Industrials to have Amazon, alongside its tech-heavyweight peers, as a member.

History Repeating Itself?

On more point to make following comments on CNBC’s last call on Tuesday night by host Brian Sullivan, who suggested the performances by Apple and Microsoft were not that impressive when they first joined the DJIA.

For Apple, the first two years after joining DJIA was "dead money" while Microsoft saw a flat stock for almost 15 years on the index. He added: “Will history repeat itself?”

It’s impossible to predict, but two points need to be made here. First both Apple and Microsoft, as per the selection criteria, gained their places exactly because their share prices were stable and they were leaders in their industry. Second, share price performance is a factor of earnings growth, not the membership of a particular club — however influential it may be.

Price Action: Walgreens’ stock fell 64% since it was included in the DJIA. At market close on Tuesday, ahead of the announcement, shares in the healthcare retailer closed up 1.5%. It’s currently trading at $21.44 — down 3.9%.

On the last check, Amazon was trading at $169.69 per share — up 1.56%.

Now Read: ‘Magnificent 7’ Widens Gap With Rest Of S&P 500, But That May Change In 2024

Image: Shutterstock

Posted In: AAPL AMZN CSCO DIA IBM INTC MSFT TSLA WBA WMT

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