GE's Ouster From Dow to Put More Pressure on Beaten-Down Giant
(Bloomberg) -- General Electric Co.’s ejection from the Dow Jones Industrial Average applies yet more pressure -- and humiliation -- to a company once revered as a model of corporate excellence.
While the decision to put Walgreens Boots Alliance Inc. in the blue-chip gauge in place of GE doesn’t change its fundamental outlook, the move will prompt some investors to rethink their holdings, analysts said.
“Symbolically, this indignity marks GE’s fall from grace,” Deane Dray, an analyst at RBC Capital Markets, said in a note. And since some investment portfolios track the Dow, “there will likely be technical selling pressure as those funds adjust for this change in the index composition.”
Although the move had been anticipated by some investors recently, the ouster is a painful blow to GE amid one of the worst slumps in its 126-year history. The shares have lost more than half their value in the past year as the Boston-based company struggled with a host of problems, from weak demand for industrial equipment and cash-flow challenges to grumbling from an activist investor and an accounting probe by U.S. securities regulators.
The change -- mirroring a shift in the U.S. economy from industrial activity to services -- removed the last original member from the benchmark formed in 1896, with GE joining the likes of Distilling & Cattle Feeding, National Lead, Tennessee Coal & Iron and U.S. Rubber. GE briefly left the index, but has been in it continuously since 1907. Dow overseers said the inclusion of Walgreens reflects economic changes emphasizing consumer and health-care businesses.
GE brushed off the Dow announcement, saying that the company remains focused on improving performance and that the news “does nothing to change those commitments or our focus in creating a stronger, simpler GE.”
Read more: Will Walgreens Sate the Dow?
The shares were little changed at $12.99 as of 9:59 a.m. Wednesday, hovering around levels not seen since 2009. That followed a 26 percent decline this year through Tuesday, by far the worst among the 30 Dow stocks.
While the Dow decision is “likely to drive near-term underperformance in the shares,” it may not be such a bad thing in the long run, according to Goldman Sachs analyst Joe Ritchie. Stocks that have been removed from the index recently have typically outperformed the rest of the Dow over the next 12 months, he said in a note.
GE could certainly use the help. It’s lost about $140 billion of market value in the last year, spurring a plan to shed $20 billion of assets in a bid to realign businesses and cut costs as the company grapples with debt challenges and flagging demand. Chief Executive Officer John Flannery, who took over for Jeffrey Immelt last year, said in May there is no “quick fix” to the company’s problems.
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