Facebook Waiting in Wings Should Dow Braintrust Get Sick of GE

(Bloomberg) -- General Electric’s worst week in eight years is rekindling an age-old debate, namely, how bad can things get before your status in the Dow Jones Industrial Average is threatened? While kicking out the longest-standing member wouldn’t come easily for the gauge’s overseers, removal could pave the way for another whose time, many say, has come.

That’s Facebook Inc., whose dominance in social media has made it one of the largest publicly traded companies in the world. Unlike other Dow omissions such as Google parent Alphabet Inc. or Amazon.com Inc., whose $1,000 price tag is too high for the price-weighted average, Facebook, at $181, would fit relatively comfortably in the range of existing members.

“If I had to put my money on it, Facebook is on top of my list,” said Richard Moroney, the editor of the Dow Theory Forecasts newsletter and chief investment officer at Horizon Investment Services in Hammond, Indiana. “GE has been floundering. They’d probably wait for GE to make an announcement of a divesture, or breakup, or anything along these lines to give them an excuse to put it out.”

For now, speculation about GE’s ejection is just that, speculation, with analysts generally mum on the topic and no hard-and-fast rules dictating the terms of membership. Still, the company’s stock chart is ugly -- it trades just above $16 after flirting with $32 as recently as July. And its gap to the highest priced Dow constituent, Boeing Co., has grown to the widest since 2011.

GE sank 45 percent in 2017, compared with a 25 percent gain in the Dow, as it struggled with weak demand for industrial products from gas turbines to locomotives and oilfield equipment. This week’s 13 percent plunge was triggered by a larger-than-expected $6.2 billion charge and Chief Executive Officer John Flannery’s comments about the possible need to break the company apart.

Selection Process

Luke Shane, a spokesman for S&P Dow Jones Indices, declined to comment on speculation about membership changes. The 30-stock gauge is unique in that its members are chosen by a committee instead of an objective, rules-based process.

According to the index manager’s website, the Dow favors a company that “has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors.” It also seeks to maintain “adequate” sector representation.

A Facebook representative declined to comment. A representative from GE didn’t immediately respond to a message seeking comment.

Internet Exposure

Facebook’s addition would raise Dow’s exposure to internet, an industry that has no direct representation beyond Cisco Systems. Other candidates on Moroney’s list to join the Dow should GE be dropped: Comcast Corp., Schlumberger Ltd. and AbbVie Inc.

At the same time, barriers exist that illustrate the challenges overseers face in deciding how soon to bless an industry such as social media. Compared with other members Facebook is young with relatively low revenue and twice the valuation of other constituents. Its dual class structure annoys some governance experts. Besides that, the Dow already has a heavy weighting in tech, and might do better holding off for Alphabet or Amazon to split their shares before making a move.

“If the committee were to decide today, I believe they might keep GE,” said Deane Dray, an analyst with RBC Capital Markets. “However, if we are still having this discussion next quarter, then that is a different story.”

©2018 Bloomberg L.P.

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