Dow Jones Industrial Average (DJIA) - These Stocks Could Get Booted From the Dow Jones Industrial Average

What Is the Dow Jones Industrial Average (DJIA)?
The Dow Jones Industrial Average (DJIA) is an index that tracks 30 large, publicly-owned blue chip companies trading on the New York Stock Exchange (NYSE) and the NASDAQ. The Dow Jones is named after Charles Dow, who created the index back in 1896, along with his business partner Edward Jones.


Understanding the Dow Jones Industrial Average
Often referred to simply as "the Dow," the DJIA is one of the oldest, single most-watched indices in the world. To investors, the Dow Jones is defined as a collection of blue-chip companies with consistently stable earnings that include Walt Disney Company, Exxon Mobil Corporation, and Microsoft Corporation. When the TV networks say "the market is up today," they are generally referring to the Dow.

The Dow Jones Industrial Average is the second oldest U.S. market index after the Dow Jones Transportation Average, which contains 20 transport stocks such as railroad and trucking companies. The Dow Jones Industrial Average was designed to serve as a proxy for the broader U.S. economy.

When the Dow Jones index launched, it included just 12 companies that were almost purely industrial in nature. The early components of the Dow operated in industries that included railroads, cotton, gas, sugar, tobacco, and oil. The performance of industrial companies is typically tied to the growth rate in the economy. As a result, the relationship between the Dow's performance and that of the economy was cemented. Even today, to many investors, a strong Dow means a strong economy while a weak-performing Dow means a slowing economy.

As the economy changes over time, so does the composition of the index. The Dow typically makes changes when a company becomes less representative of the economy or when a broader economic shift occurs, and a change needs to be made to reflect it.

For example, a company that loses market capitalization due to financial distress might be removed from the Dow. Market capitalization is a method of measuring the value of a company by multiplying the number of shares outstanding to its stock price.

How the Index Is Calculated
Stocks with higher share prices are given greater weight in the index. So, a higher percentage move in a higher-priced component will have a greater impact on the final calculated value. At the Dow's inception, Charles Dow calculated the average by adding the prices of the twelve Dow component stocks and dividing by twelve with the end result being a simple average. Over time, there have been additions and subtractions to the index, such as mergers and stock splits that had to be accounted for whereby an arithmetic mean would not suffice any longer.

This led to the advent of the Dow Divisor, a predetermined constant (though it can be changed if the need should arise) that is used to determine the effect of a one-point move in any of the thirty stocks that comprise the Dow. There have been instances (components added or removed, stock splits, etc.) when the divisor needed to be changed so that the value of DJIA stayed consistent. The current divisor can be found in the Wall Street Journal and is 0.14748071991788.

The key point about the DJIA is that it is not a weighted arithmetic average, nor does it represent its component companies' market capitalization as does the S&P 500. Rather, it reflects the sum of the price of one share of stock for all the components, divided by the divisor. Thus, a one-point move in any of the component stocks will move the index by an identical number of points.

DJIA Price = SUM (Component stock prices) / Dow Divisor
Changes to the Index Over Time
The index grew to 30 components in 1928 and has changed components a total of 51 times. The first change came just three months after the index was launched. In its first few years until roughly the Great Depression, there were many changes to its components. In 1932, eight stocks within the Dow were replaced. However, during this change, the Coca-Cola Company and Procter & Gamble Co. were added to the index, two stocks that are still part of the Dow in 2019.
The most recent large scale change to the Dow took place in 1997 when four of the index's components were replaced. Two years later, in 1999, four more components of the Dow were changed. The most recent change took place on June 26, 2018, when Walgreens Boots Alliance, Inc. replaced General Electric Company.
Components of the Dow

The table below alphabetically lists the companies included in the DJIA as of March 18, 2019:

Key Historical Dates for the DJIA

The following are some of the milestones hit by the DJIA: 
  • Mar. 15, 1933: The largest one-day percentage gain in the index happened during the 1930s bear market, totaling 15.34 percent. The Dow gained 8.26 points and closed at 62.10.
  • Oct. 19, 1987: The largest one-day percentage drop took place on Black Monday. The index fell 22.61 percent. There were no evident explanations behind the crash, although program trading may have been a contributing factor.
  • Sept. 17, 2001: The fourth-largest one-day point drop—and the largest at the time—took place the first day of trading following the 9/11 attacks in New York City. The Dow dropped 684.81 points or about 7.1 percent. However, it is important to note that the index had been dropping before Sept. 11, losing more than 1,000 points between Jan. 2 and Sept. 10. The DJIA, however, started to make traction after the attacks and regained all of what it lost, closing above the 10,000 mark for the year.
  • May 3, 2013: The Dow surpassed the 15,000 mark for the first time in history. 
  • Jan. 25, 2017: The Dow closed above 20,000 points for the first time.
  • Jan. 4, 2018: The index closed at 25,075.13, the first close above 25,000 points.
  • Jan. 17, 2018: The Dow closed at 26,115.65, the first close above 26,000 points.
  • Feb. 5, 2018: The Dow fell a record 1175.21 points.
  • Sept. 21, 2018: The index hit its current record of 26,743.50.
  • Dec. 26, 2018: The Dow recorded its largest one-day point gain of 1086.25.
  • July 11, 2019: The Dow broke above 27,000 for the first time in its his,tory.
  • Feb 12, 2020: The Dow hits a new all-time high of 29,551.
  • March 2020: The Dow Jones crashes with back-to-back record down days amid the global coronavirus pandemic, breaking below 20,000 and falling 3,000 points in a single day amid several 2,000 and 1,500 up and down moves.
These Stocks Could Get Booted From the Dow Jones Industrial Average

The keepers of the Dow Jones Industrial Average (DJIA) may have to make big changes in 2020, with the weakest components acting more like penny stocks than multinational icons. Of the 30 members, 29 are now trading below their 200-day exponential moving averages (EMAs), potentially entering bear markets that could persist for several years. Only Walmart Inc. (WMT) is bucking the downward tide, holding within 10 points of an all-time high.

This venerable instrument had to undergo big changes during and after the 2008 economic collapse, with Altria Group, Inc. (MO), Honeywell International Inc. (HON), General Motors Company (GM), American International Group, Inc. (AIG), and Citigroup Inc. (C) losing their membership status. At the current rate of descent, the new list could be even longer because a few components may not survive the pandemic.

Let's look at Dow components most likely to get booted in coming months. Several of these issues should have been removed months or years before the pandemic broke out in January, but there are no guarantees that their replacements would have performed better in the past two months. Even so, a few more members in the win column right now might have had a positive psychological effect on the investment community.

The Boeing Company (BA) has become the odds-on candidate for Dow removal following a historic decline that started with self-inflicted wounds and crashed airplanes. It seems ironic that Seattle added to that burden as ground zero in the U.S. epidemic while the rest of the world has been cancelling orders at a paid pace. There's no assurance that the company will ever return to its past glory, especially if it takes a massive bailout from the government like General Motors did years ago.

Chevron Corporation (CVX) and Exxon Mobil Corporation (XOM) have failed to post new highs since 2014, despite the roaring bull market into 2020, making them prime removal candidates. Both stocks have been crushed in recent weeks, victims of a shareholder panic generated by Saudi Arabia's odd decision to start a price war at the same time as the pandemic. This perfect storm of headwinds has now dropped both issues to their lowest lows since 2002.
It probably seemed like a fun idea to add Dow Inc. (DOW) to the DJIA in 2019, if only for the identical company name and ticker, but the decision has blown up in the keepers' faces. The commodity chemical manufacturer posted an all-time high at $60.52 just two sessions after coming public and entered a downtrend that broke 2019 support last month. The stock is now trading at half the value of its IPO, acting as a dead weight
International Business Machine Corporation (IBM) should have been removed from the Dow years ago, but it's one of the older members, added as a component in 1979. The stock has been a non-performer for the past seven years, topping out in 2013 and entering a downtrend that should be viewed as permanent at this point. Worse yet, it just broke the December 2018 low on heavy volume, dropping to the lowest low since April 2009.
Finally, defense contractor United Technologies Corporation (UTX) posted an all-time high at $158.44 just six weeks ago and turned lower, entering a brutal decline that relinquished a stomach-churning 56% while dropping the stock to an eight-year low. No, it doesn't seem like the right time to remove this issue, given the Raytheon Company (RTN) merger and the continued cash flow of a U.S. defense budget that is likely to survive intact, despite the pandemic. Even so, red flags abound for this former winner, which could post even lower lows in coming months.

The Bottom Line

The keepers of the Dow Jones Industrial Average will need to remove components in the coming months, eliminating companies that may have entered permanent declines.