“My feeling is that the Dow is not tech-oriented at all, so adding Apple is significant in that it adds to its technology (weighting),” Dan Chung, chief executive officer of investment managers Fred Alger Management, Inc. told USA TODAY last week. He set the tone for the discussion around the latest development on the Dow Jones Industrial Average, a stock index exclusively gauging 30 high-profile, blue chip companies. And the latest to join this list is none other than the biggest and most popular company in the world, Apple Inc (NASDAQ:AAPL). Apple joins other tech companies such as Cisco Systems (NASDAQ: CSCO), Intel Corp. (NASDAQ: INTC) and IBM (NYSE: IBM). Chung believes that adding Apple to its tech stocks reflects well on Dow as it makes it appear savvy with the fast-changing world of technology. And it creates a credible "consumer brand" spot on the industrial stocks index, which makes it appear more diverse, he added. Apple, with its $750 billion in market cap and $178 billion in cash on balance sheet, is double the size of the second largest publicly traded company Exxon Mobil Corp (NYSE: XOM), in the U.S.
Dow’s price level will not be thrown off track because the index will be recalculated ahead of opening trading on March 19. AT&T (NYSE: T), which has been on the industrial average since October 1916, will be exiting on the same day. The telecommunications company has one of the lowest stock prices on the index, while Dow was in the process of reconsidering having such a sizeable weighting in telecommunications stocks. Verizon Communications Inc. (NYSE: VZ) will continue to stay on the industrial stock index.
After Nike Inc. (NYSE: NKE), Goldman Sachs (NYSE: GS) and Visa Inc (NYSE: V) were added in September 2013, and Hewlett-Packard Company (NYSE: HPQ), Bank of America (NYSE: BAC) and Alcoa Inc (NYSE: AA) were shown the door; this is the first big reshuffle in the blue chip company index.
Apple and stock split
Apple’s inclusion comes on the heels of its 7:1 stock split, which comes into effect when trading opens. For Dow, inclusion of Apple before the split would have been unthinkable on its price-weighted index as Apple stock was going for over $700 per share. Another motivation for Dow to consider the inclusion of the tech giant, reportedly, is the 4:1 stock split of Visa. This split would have resulted in Visa having a smaller impact on the industrial index. The two splits complement each to bring about an offset, at least partially, for Dow. Apple stands at fifth as the most expensive stock on the index post the Visa stock split, measured at current stock prices.
Robert Leiphart, analyst with Birinyi Associates, calculates that once Apple is included in the Dow and Visa’s weighting loses focus, the Dow will jump up 6.69 points. His calculations are based on the current scenario where $1 shift in the price of stock on Dow shifts the index by 6.42 points.
Getting Dow with it
Analysts speculate that Apple’s inclusion into the high-profile stock index would make the tech company’s stock more reactive. Coupled with its pricey stock and the large number of investors that exchange Apple’s stock almost every day, the move may create initial trouble for the American tech power player. Leiphart is also of the opinion that index fund managers will not go on a buying spree of Apple stock because they only need to get as many Apple shares for their funds as is required to accurately reflect Dow’s updated weightings on March 19. "This works out to an average daily volume of 58 million shares," he added.
But all is not bad news for the American tech company, currently being traded on the NASDAQ composite. Dow is often referred to as the "people’s index" because of its popularity not just with the market players but also the common man. Dow, being an industrial index, wields a different class of investors than what Apple is used to. Dow members pay dividends, while attracting income-focused funds and creating a focus for numerous investment strategies that gives Apple a wider ownership bundle to choose from.
Final word
Will Dow be able to keep up with the fast and savvy rate of development that is Apple’s penchant? Or will Apple lose it spotlight status after running in the mix with some of the biggest companies in the world? We will only know in time. So, let’s stay tuned!
