By Michael Wursthorn and Thomas Gryta
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (June 20, 2018).
General Electric Co. will drop out of the Dow Jones Industrial
Average next week, a milestone in the decline of a firm that once
ranked among the mightiest of blue-chips and was a pillar of the
U.S. economy.
It will be replaced by drugstore retailer Walgreens Boots
Alliance Inc., the latest sign of the rise of the global consumer
economy and the postcrisis boom in debt issuance that has fueled a
worldwide deal-making frenzy.
The decision to drop GE, an original member of the Dow that has
been a part of the 30-stock index continuously since 1907, marks
the latest setback for a company that once was the most valuable
U.S. firm but has been hit hard in recent years by the unraveling
of its finance business and competitive problems.
With the departure of GE and the addition of Walgreens, "the
DJIA will be more representative of the consumer and health care
sectors of the U.S. economy," said David Blitzer, chairman of the
index committee at S&P Dow Jones Indices, the company behind
the Dow. "Today's change to the DJIA will make the index a better
measure of the economy and the stock market."
GE shares have tumbled 55% over the past 52 weeks, erasing more
than $100 billion in wealth, as the company has switched leaders,
slashed its dividend payment and pursued a restructuring that could
result in a breakup of the struggling conglomerate. It is the
cheapest stock of all 30 Dow components.
"We are focused on executing against the plan we've laid out to
improve GE's performance," a GE spokeswoman said. "Today's
announcement does nothing to change those commitments or our focus
in creating in a stronger, simpler GE."
Shares of GE fell 1.4% in after hours trading. While investors
don't expect the company's departure from the Dow to be a long-term
drag on its share price, some said its exit was a potent symbol of
how far the company's elevated status in the U.S. economy has
fallen.
"I think it tells you that GE no longer qualifies as one of the
most important companies in our country," said Michael Farr,
president of investment management firm Farr, Miller &
Washington. "In a technology driven world, it has been challenging
for manufacturing companies to remain relevant."
GE's market capitalization peaked at $594 billion in 2000,
making it the most valued U.S. company. It has shrunk over the
years. Under former CEO Jeff Immelt, the company shed its
NBCUniversal media business and sold off most of its GE Capital
arm, which was once of the biggest U.S. lenders.
More recently, the Boston-based company struck a deal to sell
its century-old railroad business, part of a plan to shed $20
billion worth of assets by the end of next year. It is also looking
to sell its century-old lighting business.
Investors are waiting for a major portfolio update from CEO John
Flannery, who took over last summer and continues to preach that
"everything is on the table." Mr. Flannery has also been slashing
jobs and cutting costs as GE struggles with slack sales in its big
Power business, which sells turbines for power plants.
GE's decline has left it with a market value of $113 billion,
but it wasn't the smallest industrial in the venerable index. GE's
market cap and annual revenue are still larger than Dow member
United Technologies Corp., which manufacturers Otis elevators and
Pratt & Whitney jet engines.
GE's market capitalization is still nearly twice as large as
Walgreens' valuation, though the two companies are about equal in
terms of annual revenue. Walgreens, which dates back to 1901, has
expanded in recent years by merging with European drug wholesaler
Alliance Boots and buying up stores from rival Rite Aid Corp.
Walgreens ended Tuesday's session with a market value of $64
billion. It joins the index even though its larger drugstore rival
CVS Health Corp. isn't a member. CVS is in the process of buying
health insurer Aetna Inc. Walgreens has taken on debt as part of
its growth through acquisition strategy: the company's long-term
debt has increased to $12.5 billion as of February from $3.7
billion in August 2013, according to its SEC filings.
Component stocks of the Dow are selected by the index committee,
a group that includes editors of The Wall Street Journal, which is
published by Dow Jones & Co., a part of News Corp.
In 2015, the committee added Apple Inc. in place of AT&T
Inc., which recently swallowed Time Warner Inc. The index has
dropped several industrial members over the years, including Alcoa
Inc. in 2013 and General Motors in 2009 after its bankruptcy
filing.
The shake-up won't affect the value of the Dow, which fell 1.15%
Tuesday and is down 0.1% this year. The index has surged to dozens
of records in the past several years, most recently in January.
The change in the Dow's composition is unlikely to lead to an
immediate shift in investor behavior. About $29.5 billion of mutual
and exchange-traded funds track the Dow Industrials, a fraction of
the $9.9 trillion in assets linked to the S&P 500 index through
the end of 2017, according to data provided by S&P Dow Jones
Indices.
--Akane Otani contributed to this article.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com and
Thomas Gryta at thomas.gryta@wsj.com
(END) Dow Jones Newswires
June 20, 2018 02:47 ET (06:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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