Kicked out of the Dow, Exxon Mobil, Raytheon Technologies and Pfizer are being replaced. But who are the new members and why are they so special?
For only the third time ever the S&P Dow Jones Indices has announced a major shake-up in its index as it switches out three stocks. This comes after Apple announced its 4-for-1 stock split which will affect the price-weighted blue stock index.
The Dow is taking this opportunity to swap out three stocks to help combat its overlap in specific industries whilst adding new companies that can better showcase the diverse and modern U.S. economy.
Salesforce replaces Exxon
Exxon Mobil is the oldest member of this index having been on the list for the past 92 years. As an oil company, it became one of the most valuable businesses in the U.S. throughout the early 2000s. It reached its peak in 2011 at which time Apple and much of the tech sector began to overtake it.
Over the years, reliance on oil has dropped and, in particular, during COVID-19 its value has degraded, while the business has also suffered from accusations that it covers up the true damage of oil refining on the environment. Once Exxon leaves, the energy sector will only take up 2% of the Dow Jones Industrial Average.
Salesforce (NYSE: CRM) on the other hand, is a leading company in the cloud computing arena and it specialises in customer relationship management. This puts it in direct competition with Adobe and, of course, Microsoft — which already claims a membership of the Industrial Average index.
However, Microsoft is highly diversified and Salesforce will bring more of that expansionist growth to the index. It holds an interest in A.I. platforms, data analytics, as well as partnering up with Alibaba (NYSE: BABA) last year. Additionally, this cloud company spends about 14% of its revenue on research and development, which is quite high in the software industry.
Salesforce is a company with lots of potential and it is a good reflection of how the U.S. market is evolving.
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Honeywell replaces Raytheon
Raytheon Company merged with existing Dow Jones Industrial Average member United Technologies in April of this year; four months later and the newly named Raytheon Technologies is about to be dropped by the index. The Dow opted instead to keep Boeing as its predominant aerospace and defence stock.
Honeywell (NYSE: HON) will now take the place of Raytheon, which belongs to the same sector and it has a long history of working with NASA since the beginning of spaceflight. Furthermore, it is widely diversified with acquisitions ranging from companies that specialize in safety and protective clothing to data storage and surveillance hardware.
Only a couple of months ago I wrote about Honeywell showing signs of building an economic moat and as the months have passed from its March-lows, it has recovered steadily, up more than 60% as of August 27. It has kept up with the NASDAQ, outperformed the S&P 500, whilst also producing a dividend yield of 2.25%.
Honeywell is a strong and stable stock, a perfect and more diverse replacement for Raytheon Technologies.
Amgen replaces Pfizer
Pfizer, a pharmaceutical company, has been in the news recently as part of its development of vaccines for COVID-19. Yet, despite its essential knowledge and services in the fight against coronavirus, it has not fared well this year as revenue suffered a decrease of 11% year-over-year and underperformed in 2019. The Dow has Johnson & Johnson on its Industrial Average index and as such remains a better choice to keep as part of the pharmaceutical sector due to its diversified business model and stronger cash flow.
Amgen (NASDAQ: AMGN) as the replacement for Pfizer is also taking a role in the development of a vaccine, but its approach is different as it tests the drug Otzela on patients with COVID-19 whilst it also invests a $2.7 billion stake in the Chinese Biotech firm BeiGene.
In Q2 Amgen posted EPS of $4.25 on sales revenue of $6.2 billion. This is an increase year-on-year of 7% and 6% respectively. Q3 expectations are an increase of 6% profit and 9% sales which will be due primarily to new drugs such as Evenity, predicted to peak at $500 million in sales.
Although Amgen has experienced volatility in growth over the past few years, it is in a position to benefit from the increase in research and development in the pharmaceutical sector, particularly in a post-COVID world.
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