The Strategist

GE leaves Dow Jones Industrial Average

06/20/2018 - 15:10

Shares of the American conglomerate General Electric (GE), capitalization of which was the largest on the US and world market company at the beginning of this century, will be removed from the Dow Jones Industrial Average, said S&P Dow Jones Indices.

GE was the last company to be in the DJ since its inception in 1896; it has been included in the index almost all the time except for a short period at the beginning of the 20th century. After, the company once again entered the index. Initially, there were 12 industrial companies in the index, and their number increased to 30 in 1928.

In 2000, the capitalization of GE reached a record $ 594 billion. It entered the world's list of leaders after the shares of technology companies began to fall as a result of bursting of the bubble. GE was at the top for several years, until it was replaced by Exxon Mobil, the value of which grew thanks to the boom in the commodity markets.

Over the past year, capitalization of GE declined by 55%, or more than $ 100 billion, while the Dow Jones index rose by 15.1%. Now GE is worth $ 114.65 billion, being the cheapest company in the index.

GE was actively expanding business in various areas under Jack Welch, who was its CEO in 1981-2001, and was replaced by Jeffrey Immelt. However, the crisis of 2008 hit hard on the expanding business empire. Later, the company had to get rid of most of the financial department of GE Capital, which before the crisis was one of the largest creditors in the US, as well as from the media division NBCUniversal. GE began reducing assets at Immelt, but John Flanneri, who replaced him last summer, intensified the process. In November 2017, he announced a major reorganization, as a result of which the GE business will be built around three main divisions related to the aviation industry, the energy sector and the health sector.

The restructuring plan involves the sale of assets at $ 20 billion by the end of 2019. Within its framework, GE has already agreed to sell the railway business and plans to get rid of the lighting equipment business; both units were created more than a century ago.

Financial problems keep following GE. In January, new difficulties, inherited from previously acquired insurance companies, emerged in GE Capital. GE said it will write off $ 6.2 billion in the fourth quarter of 2017 and allocate $ 15 billion for a seven-year period to increase the reserves in the insurance business that it retained, while it got rid of banking and other financial assets. Flannery then even said that the management is considering a possibility of dividing GE into parts.
the index
In the instead, GE will be replaced by the pharmacy chain Walgreens Boots Alliance with a capitalization of $ 64 billion. As a result, "DJIA will better represent the US consumption and health sectors," said David Blitzer, chairman of the index committee of S&P Dow Jones Indices.

Unlike most indexes, the weight of companies in DJIA is determined by the price of their shares, rather than market capitalization. With a share price of $ 12.95, GE's weight was less than 0.5 percentage points. Walgreens Boots Alliance's share price is higher ($ 64.61), so its weight in the index will be much larger, Blitzer said.

Refolding of the index will occur before the start of trading on Tuesday, June 26.

In the beginning, DJIA consisted exclusively of industrial companies, now they are almost gone. GE became another such company, expelled in recent years, following Alcoa in 2013 and General Motors in 2009 after the automaker’s bankruptcy. But in 2015, the index committee added Apple.


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