If Apple Joins the Dow, Who Would Exit?

The Apple Inc. World Wide Developers Conference in San Francisco on June 2 Photograph by David Paul Morris/Bloomberg

Contrary to what you might have seen on CNBC, Apple stock did not decline 85 percent over the weekend; it split seven-to-one, so that an investor holding one share worth about $644 on June 6 had seven shares worth about $92 at the start of trading on Monday. Any Econ 101 textbook will tell you that, on the one hand, stock splits shouldn’t matter, because it’s mere math;. On the other hand, they might matter because investors are crazy and some people really might buy a stock because it seems “cheaper.”

Some other people who care about nominal stock prices are the members of the Dow Jones Averages Index Committee, who choose the components of the Dow Jones industrial average. Unlike better benchmarks that track more equities and weight them according to market value, the 30-stock Dow is calculated according to price. Its constituents cost an average of $87.83. A $644 stock would carry far too much sway in the Dow; a $92 stock would fit perfectly. Apple, it has been widely assumed, split its stock to this level to make it more likely that it can be added to the clumsy but august gauge.

If the Averages Committee does tap a newly “inexpensive” Apple to join the Dow, who would exit? Obvious candidates are IBM and Goldman Sachs. At the risk of piling on to Big Blue—see our recent cover story about IBM’s struggles in cloud computing—the company has had the worst return of its peers over the last 12 months, dropping 9.2 percent. Goldman has had the fourth-worst price change, down 0.9 percent. At the same time, IBM and Goldman have the second- and third-highest weighting in the Dow, meaning their lackluster performances have had an outsize drag on the index.

Goldman was added just last September—the last time the Averages Committee rejiggered the index—along with Visa and Nike; Bank of America, Hewlett-Packard, and Alcoa were deleted.

    Before it's here, it's on the Bloomberg Terminal.