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GE's struggles put its 'blue chip' status in jeopardy

  • General Electric remains one of the 30 largest companies in the U.S. stock market and offers broad exposure to global capital goods.
  • The next largest industrial conglomerate, Honeywell, was kicked out of the Dow in 2008 and has just announced a plan to spin off two smaller units into new public companies.
  • It isn't clear the committee behind the Dow Jones industrial average is anxious to add the stocks of companies more involved with the latest technological innovations.
A monitor displays signage for General Electric Co. (GE) on the floor of the New York Stock Exchange (NYSE) in New York.
Michael Nagle | Bloomberg | Getty Images
A monitor displays signage for General Electric Co. (GE) on the floor of the New York Stock Exchange (NYSE) in New York.

General Electric has been in the Dow Jones Industrial Average since the index debuted 121 years ago. But it's premature to talk about ejecting GE from the Dow, even though the stock has gone nowhere in the past 20 years and the company has lost Wall Street's confidence.

GE's alarmingly weak earnings report and downbeat outlook issued on Friday prompted a bit of chatter suggesting the company is no longer worthy of its bellwether status in the Dow. If good stock performance and the affection of investors were the main criteria for continued inclusion in the Dow, then maybe the Dow critics would have a case.

That's not the case, though. The Dow is meant to track a group of big, economically important companies, with a tilt toward industrial giants. By any relevant measure, GE qualifies: Even after two decades of ugly underperformance in the shares, GE's market value is still around $190 billion, placing it among the 30 largest names in the U.S. stock market. It has annual revenue of about $125 billion and offers broad exposure to the global capital-goods sector, from jet engines to locomotives to power generators to healthcare equipment.

For better or worse, huge industrial companies sometimes falter and lose the confidence of investors and analysts. But that doesn't undermine their economic importance.

And what other industrial company is worthy of replacing GE right now, if the keepers of the index at S&P Dow Jones Indexes wanted to push it out? The next largest industrial conglomerate is Honeywell, at $111 billion — but it was kicked out of the Dow in 2008 and is slimming down, with a plan to spin off two smaller units into new public companies. Lockheed Martin and Danaher are well-regarded, but both are narrower and a good deal smaller than GE.

And it isn't clear that the index committee is itching to find room for huge New Economy names just yet. Amazon has a $470 billion market value and massive economic scope, but its record of profitability and lack of a dividend might hurt its candidacy. Facebook, Alphabet and even Comcast are worthy bellwethers of today's networked economy. But each one has founders with voting control through special share classes, which also could disqualify them.

The fact is, GE's continued presence is of little consequence to how the Dow might perform from this point, anyway. Because the index uses a simple – some would say archaic – weighting scheme based on share price rather than market value, GE's price in the low-$20s reduces the company to a rounding error in the Dow. Right now, the stock carries only a 0.7 percent weight in the index, dwarfed by such high-priced peers as Boeing, Caterpillar and 3M.

Even if GE is ultimately booted from the Dow, perhaps after more asset sales or spinoffs reduce its relevance, it might not be terrible for its shareholders: Historically, stocks newly deleted from the Dow have often outperformed the index itself afterward, as the ejections often happen when investor sentiment and valuation are near a bottom.

Disclosure: Comcast is the owner of NBCUniversal, the parent company of CNBC and CNBC.com.

Correction: This story was revised to correct Honeywell's plans. It intends to spin off two divisions into new public companies.