- One retailer replaces another in America’s oldest stock market index
- Amazon becomes the third member of the Magnificent Seven to join the thirty-stock Dow Jones
- Walgreens Boots Alliance drops out after nearly six years in the index
- Those stocks that are kicked out have had a knack of outperforming their replacements
- Changes in the Dow’s composition are irregular, unlike the UK’s quarterly index reviews
“Changes in the membership of America’s thirty-stock Dow Jones Industrials, the country’s oldest stock market index, are not as regular as the UK’s quarterly reviews, so they always attract attention and in the first change since August 2020 Amazon will replace Walgreens Boots Alliance on Monday,” says AJ Bell investment director Russ Mould. “Amazon will thus become the third member of the so-called Magnificent Seven to join the index, after Microsoft in 1999 and Apple in 2015, although investors may still need to be careful given how shares in recent deletions from the Dow have had the knack of then doing better than those of the firms who replaced them.
“It may therefore be premature to see Amazon’s elevation and Walgreen Boots Alliance’s demotion as the latest logical step in the demolition of brick-and-mortar retail by online rivals (especially as Amazon makes far more money from AWS, its servers, data centres and cloud storage operation than it does from retail in either America or overseas).
Source: Company accounts
“Investors may also need to ponder whether this is a great time to buy, amid the hoopla stirred up by its promotion. In the last batch of changes, in summer 2020, Amgen, Honeywell and Salesforce replaced Pfizer, Raytheon (now RTX) and ExxonMobil.
“The oil major’s fall from grace, after a ninety-two-year stay which begun when it joined the Dow in 1928 as Standard Oil Company of New Jersey, was hailed by many as a sign that the world was indeed moving swiftly away from hydrocarbons and that Big Oil was on its last legs.
“However, ExxonMobil has since outperformed all of the three stocks that replaced it hands down and Raytheon has done the same, as defence stocks have roared back into fashion thanks to the wars in Ukraine and the Middle East.
Source: LSEG Datastream data
“Walgreens Boots Alliance, formed in late 2014, has been worn down by its debts and fierce competition, while plans to sell Boots have so far come to naught. It replaced another fallen corporate US giant, General Electric, whose fortunes investors had written off and whose time had apparently come and gone. Yet since Walgreens Boots Alliance replaced GE in June 2018, the former’s shares have more than doubled and the latter’s have more than halved.
Source: LSEG Datastream data
“There is a risk, therefore, that changes in the index reflect what has already happened rather than what may happen next. Whether Amazon’s promotion, coupled with founder and chair Jeff Bezos’ move to sell dollops of stock, is another subtle signal is something that only time will tell, although fans of the stock will counter by pointing out how both Apple and Microsoft have massively outperformed the firms they replaced in the Dow. Apple booted out AT&T in 2015 while Microsoft entered the index in 1999, when it, Home Depot, Intel and SBC Communications replaced Chevron (which returned to the fold in 2008), Goodyear Tire, Sears Roebuck and Union Carbide.”
Source: LSEG Datastream data. *SBC did a reverse takeover of AT&T in 2005. **Sears Roebuck filed for bankruptcy and moved to OTC Pink Sheets in 2018. ***Union Carbide acquired by Dow Chemical in 2001.
