Markets

Salesforce, Amgen and Honeywell added to Dow in major shake-up to the average

Key Points
  • Major changes are coming to the Dow Jones Industrial Average.
  • Salesforce.com will replace Exxon Mobil, Amgen will replace Pfizer and Honeywell International will replace Raytheon Technologies.
  • The changes will go into effect before the market opens on Monday, August 31.
  • The shake-up was prompted by Apple's decision to enact a 4-for-1 stock split, which would significantly reduce the benchmark's exposure to the information technology sector.
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Salesforce, Amgen and Honeywell to join Dow Jones Industrial Average

Major changes are coming to the Dow Jones Industrial Average.

S&P Dow Jones Indices said Monday that three new companies will be joining the 30-stock benchmark. Salesforce.com will replace Exxon Mobil, Amgen will replace Pfizer and Honeywell International will replace Raytheon Technologies.

The changes will go into effect before the market opens on Monday, August 31.

The shake-up was prompted by Apple's decision to enact a 4-for-1 stock split, which would significantly reduce the benchmark's exposure to the information technology sector.

"Basically Apple — by itself — took the technology [weighting] within the Dow down from 27.6% to 20.3%. It's a significant decline," Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, told CNBC. "By adding Salesforce, you can come back to 23.1% of the Dow being in technology."

As a result of Apple's 4-for-1 stock split, its ranking is set to drop from the most heavily-weighted component down to the 17th most influential. The 124-year-old blue-chip average is price-weighted, meaning stocks with higher share prices are given greater weighting. The S&P 500, on the other hand, is based on market capitalization. 

Apple has soared more than 70% this year, on the way becoming the first U.S. company to hit a $2 trillion market capitalization. The tech name has contributed more than 1,400 points to the Dow in 2020, making it by far the largest contributor. Without Apple's heavy-lifting, many on Wall Street believe the Dow could have a harder time catching up with the S&P 500 and the Nasdaq Composite, which have already reclaimed their respective records.

Stock splits within the index are rare. Silverblatt noted that the last was Nike's 2-for-1 split in Dec. 2015, and said that Apple's coming split will be just the 18th since 1999.

Based on Monday's closing prices, UnitedHealth Group will become the most heavily weighted component in the Dow, followed by Home Depot and Amgen. Salesforce will be the sixth most weighted stock, and Honeywell the 11th, according to S&P Dow Jones Indices.

Silverblatt added that the 3-stock shake-up is "extremely unusual." "This is a massive amount, especially when you add in Apple, which re-weights it significantly. So we expect to see a lot of action on it, a lot of buying and selling," he said.

The last time three simultaneous changes occurred was 2013, when Goldman Sachs, Nike and Visa replaced Alcoa, Bank of America and Hewlett-Packard.

Monday's stock swap announcement also encapsulates the changing picture of the market.

The moves "help diversify the index by removing overlap between companies of similar scope and adding new types of businesses that better reflect the American economy," S&P Dow Jones Indices said in a statement.

Exxon has been a Dow component for nearly 100 years. It was first added as Standard Oil of New Jersey in 1928 when the benchmark expanded from 20 stocks to 30. Pfizer was added in late 2004. For Honeywell, it's a return to the Dow after it was removed in Feb. 2008.

The announcement puzzled some on the Street.

"I'm surprised by the news as energy still powers the world but we know how out of favor it is," said Peter Boockvar, chief investment officer at Bleakley Advisory Group. "I'm not sure there is much difference between PFE and Amgen nor Honeywell and Raytheon."

Companies typically covet a spot on the blue chip index, but it doesn't necessarily come with a boost for shares. Walgreens is the most recent addition to the Dow, and its shares are down 40.9% since it was added on June 26, 2018.

The Dow has gained about 55% from its March 23 low, sitting 4% below its all-time high of 29,568.57 from Feb.12.

Shares of Salesforce and Amgen jumped 4% in extended trading on Monday following the news, while Honeywell advanced 3%. Exxon, Pfizer and Raytheon were all down about 2% in after hours trading.

- CNBC's Yun Li, Fred Imbert and Kevin Stankiewicz contributed reporting.

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