They Kicked Exxon out of the Dow

By John Banks

After 92 years, Exxon Mobil was ejected from the Dow Jones Industrial Average — along with two other names — as S&P Dow Jones Indices announced on Aug. 24 the biggest shake-up to the Dow’s line-up in years.

Exxon, in various forms, had been a part of the Dow Jones Industrial Average since 1928. But not any longer. As a battered and tattered energy stock, Exxon had to go.

As of April 2020, the entire U.S. energy sector — the whole thing — was worth just $701 billion.

That means there are five individual FANG stocks — Apple, Amazon, Microsoft, Facebook, and Google (Alphabet) — that have market caps larger than the whole U.S. energy sector.

And that isn’t FANG as a group either. Each individual name, on its own, is bigger than the entire energy sector. Apple alone, with a market cap of $2.1 trillion as of this writing, could swallow the April-vintage U.S. energy sector three times over.

Ten years ago, CNBC reported, the energy sector was 10.89% of the S&P 500. Today it is just 2.5%.

The S&P 500 weighting of technology stocks, meanwhile, is 28.17%. In S&P 500 market cap terms, software and the cloud outweigh fossil fuels by more than 1,000%.

No wonder they booted Exxon, which has fallen from a market capitalization of greater than $500 billion in 2007 to just under $173 billion today (a roughly 65% decline).

At its $500-billion-plus market cap peak in 2007, Exxon was the most valuable company on the planet. Ironically, 2007 was the same year the iPhone was introduced — a foreshadowing of history, perhaps, as Apple would become the world’s most valuable company years later. To stay with the times, the Dow had to free up room for more tech. 

To that end, S&P Dow Jones Indices also announced the departure of Pfizer, a pharmaceutical drug manufacturer, and Raytheon Technologies, an aerospace and defense manufacturer.

To replace these banished names, the Dow will be adding Salesforce, Amgen, and Honeywell to the line-up. Salesforce is a cloud-based SAAS (software as a service) company. Amgen is another drug manufacturer, and Honeywell does specialty machinery. 

To be clear, the Dow Jones Industrial Average is, in and of itself, a dusty artifact of history.

In some ways the Dow is like the QWERTY keyboard layout. It doesn’t make much sense, and there are better ways to go, but it’s been around so long there is a psychological lock-in effect.

As Washington Post columnist Allan Sloan has pointed out, everybody talks about the Dow, but nobody actually uses it, whereas the S&P 500 is the opposite. In terms of investor capital tied to market benchmarks, there is $28 billion tracking the Dow — and a whopping $4.59 trillion tracking the S&P.

The Dow Jones Industrial Average is far less useful, in part, because it tracks a mere 30 stocks, whereas the S&P 500 tracks a more robust 500 companies (which is, of course, why they call it the S&P 500). 

The Dow Jones Industrial Average is also kind of goofy because it is literally an average of the various stock prices making up the Dow’s thirty components.

This means that, when a Dow component executes a stock split — as Apple plans to do on Aug. 31 — the value of the Dow is directly impacted by the change in share price alone. This is not logical, as a stock split doesn’t change the value of a company. It is like dividing a pizza into smaller slices.

Because the Dow is formulated based on actual stock prices, there are other oddball quirks. The committee that picks new Dow components likely wouldn’t choose Amazon, for example, because the share price is too high relative to the other components.

Again, this has nothing to do with actual company valuations — just the share price. That is how they rolled in 1896 (the year the Dow was created).

The quirky share price thing further explains why Chevron, another oil and gas company, gets to stay in the Dow, even as Exxon gets canned. At $160 billion as of this writing, Chevron’s market cap is slightly smaller than Exxon’s — but Chevron’s stock price is more than twice that of Exxon’s (because of a different share count) in nominal terms, which the Dow selection committee prefers! 

So anyway, it’s all kind of a sideshow, though the Dow still makes waves because the Dow “is” the stock market in the eyes of so many investors. (Instead of “what did stocks do today,” the common question is, “What did the Dow do today?”)

Then, too, the exiting of Exxon — after 92 years holding a spot — is a kind of milestone indicating the passage of history, as the tech sector rises up and the entire U.S. energy industry kind of fades away.