The team members at the S&P Dow Jones Indices group made a bold decision by removing AT&T Inc. (NYSE: T) from the Dow Jones Industrial Average (DJIA) and replacing it with Apple Inc. (NASDAQ: AAPL). While 24/7 Wall St. has outlined what investors need to know about this key change, there is something else that many investors may be wondering about: which Dow stocks could get booted off of the index next. And which companies might actually replace them if they do?
It turns out that there are three potential changes that could be made in the Dow. Before you go making any big bets here, understand that the Dow team does not like making sweeping and broad changes to the DJIA. It may be an outdated index, but it is perhaps the oldest key stock market barometer, and it is supposed to represent the broad financial markets outside of utilities and transportation.
Of the three changes that could come down the road, these could be in Big Pharma, in financials and banks, and in key industrials.
Many companies have been removed from the DJIA in modern years. Companies like Philip Morris (now Altria), Honeywell, Hewlett-Packard, Kraft Foods, Bank of America, Citigroup, General Motors, AIG, Eastman Kodak, International Paper and others have all been removed from the Dow.
If you go back to 1999, only 20 of the current DJIA stocks will remain after AT&T is dropped. If you go back to 1987 (before the crash), only 13 of the current 30 Dow members are still in the index, after considering AT&T.
Here are three potential changes that could be seen in the years ahead as the next round of DJIA index changes are made. Again, they could take years, or just never occur.
Health Care and Big Pharma Could Change … to Big Biotech?
Pfizer Inc. (NYSE: PFE) and Merck & Co. (NYSE: MRK) have both been restructuring in a manner that either company could potentially be split up by management. Then there was the planned tax-inversion strategy that was once pursued by Pfizer. DJIA stocks are supposed to industry dominators, and while these both dominate Big Pharma, their growth days are in the past and the ongoing patent expiration cliff has been a continued source of misery. Pfizer is worth $210 billion, versus $163 billion for Merck. If either company splits into two, the company could be jettisoned by S&P Indices off the DJIA (as happened to Kraft).
Who would replace Pfizer or Merck if they were booted?
Would S&P dare to become new age on us? Would it dare to consider adding a biotech giant like Gilead Sciences Inc. (NASDAQ: GILD)? Gilead has a market cap north of $154 billion, it has a low forward price-to-earnings (P/E) ratio of about 10, and it still has revenue and earnings growth projected ahead. Oh, and Gilead even recently announced that it would begin paying a dividend, which now would be about a 1.7% yield. Most investors are still betting big on the future of biotech. The question is whether Gilead’s market cap will keep rising to the point that it passes Merck or Pfizer, as well as whether Merck and Pfizer can get growth back on track and remain single companies.
Is Big Biotech is the new generation of Big Pharma? Please note that if the index team at S&P added a biotech to the Dow, it might be an earth-shattering change, as biotech has never ever been a part of the Dow.
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