The Dow Jones Industrial Average hasn't had a makeover in almost four years, and this time, it's a doozy. Amazon.com (AMZN) will replace Walgreens Boots Alliance (WBA) in the elite 30-component index before markets open on February 26, S&P Dow Jones Indices said in a press release late Tuesday.
Not that anyone should be too surprised. The keepers of the Dow have long been under pressure to elevate Amazon to the blue-chip barometer. Not only is it the largest e-commerce company in the U.S., but it's also the market leader in cloud services. And then there's Amazon's presence in the analog world, which includes freight & logistics operations and the Whole Foods grocery chain, among other endeavors.
Most important, there's the little fact that Amazon stock has been one for the ages. Anyone who put $1,000 into AMZN stock a couple of decades ago would be delighted with the results today. But that's just what Amazon does over the long term. Between its initial public offering in 1997 and December 2020, Amazon stock created nearly $1.6 trillion in wealth for shareholders, making it one of the 30 best stocks since 1990.
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Why is Amazon replacing Walgreens in the Dow?
Shareholders in Walgreens, on the other hand, probably should have seen this coming. The pharmacy chain slashed its dividend in January by almost half to redirect cash back into the business. WBA stock is also long-time market laggard. Indeed, Wall Street analysts have had a consensus Hold call on shares for years, routinely ranking WBA low on their list of best Dow Jones stocks.
The final nail in the WBA coffin, however, was its ever-shrinking share price. At around $21, WBA goes for roughly half the next-cheapest Dow stock, Verizon (VZ), at $40. The most expensive Dow Jones stock is UnitedHealth Group (UNH) at $520.
These wide price gaps are a problem because while the S&P 500 is weighted by market capitalization, the Dow is weighted by share price. WBA was begging to be replaced, if only because its low share price made it almost immaterial to the direction of the Dow.
Amazon stock is a much better fit in this regard. At about $169 a share, Amazon's weight in the Dow will land at 17 out of 30, or roughly 2.8%. For comparison's sake, AMZN stock's weighting in the S&P 500 stands at 3.7%.
Although the Dow will start out being underweight Amazon, that's better than having no exposure to one of the most important companies in the U.S. economy. Amazon is also a good fit for the Dow in that although we think of it as a tech name, it's actually part of the consumer discretionary sector. Swapping Amazon in for Walgreens, a consumer staples stock, doesn't technically increase the Dow's weighting in the IT sector.
Neither does the swap much affect the Dow's dividend profile. "Amazon.com joins Boeing (BA) and Salesforce (CRM) as the only non-dividend paying issues in the DJIA (Walgreens paid a dividend)," notes Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. But, at 1.93%, the Dow retains its higher projected dividend yield over the S&P 500 (1.41%), Silverblatt adds.
The bottom line
Being tapped for the Dow is more about prestige than fund flows. The S&P 500 is the most commonly used benchmark for U.S. stock performance, not the Dow. That's why Amazon stock, with a market value of more than $1.7 trillion, took the news of being tapped for the blue-chip barometer in stride Wednesday.
But, if nothing else, bringing Amazon into the Dow seems long overdue. As for Walgreens, WBA's tough start to 2024 hasn't been good for anyone following the Dogs of the Dow. Management is trying to turn things around. Analysts say it will be a multi-year process.
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