General Electric Co. faces the risk of losing its membership of the elite 30-stock Dow Jones Industrial Average, given its dwindling share price and the likelihood that its new chief executive will dramatically slim down its sprawling operations, Reuters reports, citing US market watchers.
“Since it is trading at a low share price and has a small weighting in the index, that does put it at an increased risk of getting removed,” Alex Bryan, director of passive strategies research at Morningstar in Chicago, was quoted as saying.
“I don’t think it’s obvious that it is going to be removed from the index, but it certainly is at risk.”
GE’s shares last week closed under US$20 for the first time in more than five years, its struggles made clear by a disappointing third-quarter earnings report last month, Reuters noted.
The stock closed at US$20.49 on Friday, marking a 35 percent decline in 2017.
The stock price is now the lowest among Dow members. Because the Dow is a price-weighted index, unlike the benchmark S&P 500 which is influenced by the market values of its constituents, that means GE has the least impact on the Dow’s daily swings.
As of Friday, GE’s weight stood at only 0.6 percent. By comparison, aircraft maker Boeing, whose stock is above US$260, has a 7.7 percent weight.
Changes to the Dow are made on an as-needed basis and selection is not governed by quantitative rules, according to published methodology for the index.
Ivan Cajic, vice president for index and ETF research for ITG, said if the Dow were to make a change in the near future, GE is the likeliest to be removed.
“I wouldn’t be surprised if the company is safe for the time being and Dow Jones adopts a wait-and-see approach over the next few months to see how both the stock price and what the overall company looks like in the coming months,” Cajic told Reuters.
GE’s fate as a Dow component may become clearer on Monday when CEO John Flannery, who took the helm on Aug. 1, is expected to detail the businesses the company plans to exit as it seeks to revive its financial prospects.
If GE starts selling big parts of its operation, the committee overseeing the Dow “would give serious thought to whether or not the new GE, (excluding) those businesses, still represents as much a part of the economy as they once had,” said Dave Nadig, CEO of ETF.com.
“If they continue to spin off and restructure businesses, they are going to just shrink,” said Chuck Carlson, contributing editor to Dow Theory Forecasts newsletter.
For now, GE still holds a major position in industries such as aviation, power and healthcare, and its market value of about US$175 billion puts it in the middle of Dow components. Its historic place in the Dow may also be an argument for it to remain.
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