General Electric will be replaced by Walgreens Boots Alliance, a company that operates pharmacy stores. It is the second largest pharmacy chain, behind only CVS Health. The decision to put the company in Dow aims to “make the index a better measure of the economy and the stock market” – as explained by the managing director of the S&P Dow Jones Indices’ index committee, David Blitzer. According to the statement, giving more consideration to the healthcare sector will make the index more representative of the general market. Walgreens’ shares went up over 4% after the news broke out, while GE shares dropped 1.5%.
As past experience has shown, being dropped from the Dow does not necessarily entail a downturn for the company. Goldman Sachs analysts commented on the issue: “Lastly, while a negative in the near-term, we note that recent removals from the index have gone on to outperform the DJIA in the 12-months following the announcement”. Although the share prices experienced a slight drop right after the news, it is likely that in the long-term the prices could go up. Some of the previous examples demonstrate this clearly. For example, after AT&T was replaced in Dow by Apple in 2015, its shares saw an increase of 15% during the next year. Similarly, Bank of America and HP both saw very large surges after they left the Dow Jones Industrial Average.