We recently had a request to discuss Apple’s upcoming stock split from a serious Wall Street player. We never name names, but trust us: if s/he is asking, it’s worth doing the work. There’s likely more than one piece on this, but here’s our first effort in our customary 3-point format.
#1: Apple is currently 11.2% of the Dow Jones Industrial Average, and that measure is Main Street’s primary tool to assess how US stocks are performing. This, for example, is the Google search count for “dow jones” and “s&p” over the last year:
In brief, Americans search for the “Dow” 7x more than the “S&P”, so while the Average may seem like an anachronism it is still the metric Americans use to assess the direction and stability of stock prices. The Dow still matters.
#2: Apple’s 4:1 stock split scheduled for August 28 will see its impact on the Dow decline materially and fundamentally remake the Average.
- At today’s prices, Apple’s post-split shares would trade for about $110.
- The closest comp for that share price currently is Travelers, which is 2.9% of the Dow.
- Assuming post-split Apple comes in at a similar weight to TRV, this will take the Dow’s Tech exposure down from 27.3% to 20.6%. The other names in this sector and their weights: Microsoft (5.6%), Visa (4.9%), IBM (3.2%), Intel (1.2%) and Cisco (1.2%). We assume that the Dow committee will reallocate Apple’s share equally among all constituents.
For reference, the S&P 500’s current weighting to Technology is 27.9%, or 38.1% if you lump in Amazon (4.8%), Google (3.2%) and Facebook (2.2%).
- While Tech will still have the largest industry weighting in the Dow, Health Care will be much closer to an equivalent allocation at 15% relative to before Apple split. The names here: UnitedHealth (7.8%), Johnson & Johnson (3.8%), Merck (2.1%) and Pfizer (1.0%).
This is essentially the same as the S&P 500 Health Care weighting of 14.6%.
- Aside from UnitedHealth (at that 7.8% weight), the other key names in the Dow will be (based on their current weighted, pre-Apple split):
Home Depot (6.9%), Microsoft (5.6%), Goldman Sachs (5.1%), McDonalds (5.0%), Visa (4.9%), Boeing (4.2%), 3M (3.9%), J&J (3.8%) and Caterpillar (3.4%).
The upshot here: the Dow will shortly have a lot less Technology exposure, and right in the middle of the largest Tech stock rally of all time. The Average has modestly underperformed the S&P YTD (-5.9% vs. +2.3%), but its 1-year performance lags badly (+1.4% vs. +12.8%). Much of this is due to a lack of Big Tech exposure.
The gap will either close because non-Tech sectors start to catch up or…
#3: … Perhaps the Dow committee needs to finally develop a work-around like fractional shares to allow it to include high-priced stocks. Industry leading companies, especially in Technology, tend to have high stock prices. Google (+$1,400) and Amazon (+$3,100) are commonly mentioned examples, but consider that NVIDIA (+$440) might be a good replacement for Intel ($49). Or that Tesla ($1400) might make a good Dow component in a few years if its operational success mirrors its recent stock price performance.
Summing up: odd as it may sound to most finance professionals, the Dow really does matter in terms of how most Americans interpret the signaling effects transmitted by stock prices. Apple’s stock split will leave the Dow with much-diminished exposure to America’s most important industry. The list of Tech companies that the Dow committee could add to improve its Technology allocation is severely limited by systematically high stock prices. Either the committee will have to change its process, or it will increasingly present an unduly negative representation of American industry and human ingenuity.