Ask a Fool: Why Was General Electric Removed From the Dow?

Q: I read that General Electric is being replaced in the Dow Jones Industrial Average by Walgreens. Why did this happen and how will this affect the index going forward?

The “why” is easy. General Electric (NYSE: GE) has been a terrible performer, down about 55% over the past year while the S&P 500 has gained 13%, and the company is on shaky financial ground.

The Dow is supposed to be a collection of 30 companies that represent the overall performance of large U.S. companies. GE is no longer a good representative of how other companies of its size or in its sector are doing, so its removal makes perfect sense.

To understand the impact of GE’s removal, it’s important to understand one basic principle about how the Dow works: It’s a price-weighted index, not a market cap-weighted index like the S&P 500. In other words, a $50 stock would have twice the influence on the Dow as a $25 stock.

With a current share price of less than $13, General Electric barely influences the Dow at all. As of this writing, it represents less than 0.4% of the index by share price. The most expensive stock in the index, Boeing, has nearly 27 times the influence on the Dow’s performance than General Electric.

In short, General Electric had become a poor representative of the overall large-cap market and barely had any influence on the index. On the other hand, its replacement, Walgreens Boots Alliance, has been a much more stable stock, and with an approximately $68 share price, it has more of an ability to actually have its performance reflected in the index.

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Matthew Frankel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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