It’s been a few weeks since Dow Jones Indices booted Exxon Mobil (NYSE:XOM) and two other companies from the iconic Dow Jones Industrial Average. The move triggered a drop in Exxon Mobil stock and a lot of chatter about a deeper meaning behind the restructuring.
Some reflection is warranted on the DJIA’s choices and the future of Exxon Mobil stock.
A responsible investor tries to keep up with and understand significant moves by organizations like this. Index managers can influence how a company is viewed, but that’s really about it. As the investor gains experience, it becomes clear that the decisions by companies, other investors and government officials carry greater weight than managers of an index.
Index managers remind me of the chain gang standing on the sidelines of a football game. They keep up with the football’s location. They hold links of metal to measure the distance a team needs to advance to keep possession of the ball.
Although the gang’s role is appreciated, the players on the field are actually engaged in the game. The players’ abilities determine the team’s success or failure. Which is why all eyes are on them and only on the chain gang when specific circumstances arise.
DJIA and Exxon Mobil Stock
Exxon Mobil’s removal from the storied index says more about the DJIA than it does the company.
The DJIA, which seems to be as old as dirt, is trying hard to matter. Frankly, I think most investors pay some attention to it only because we’re accustomed to doing so. The figure lives on the corner of business channel screens. Major moves draw headlines (even though it’s probably because Dow is a short word and fits easily).
But the index’s relevance as an indicator of market performance is drastically overstated. Why? Because it tracks a whopping 30 companies. Maybe this is all their dusty ledger book holds. This is a tiny, tiny sliver of the wide-ranging modern stock market.
To contend this teeny sampling is a worthwhile measure of the market’s behavior is like saying a rain gauge in beautiful Key West, Florida, accurately informs about the weather in Los Angeles.
The result of this restructuring is Exxon Mobil, pharma company Pfizer (NYSE:PFE) and defense industry stalwart Raytheon Technologies (NYSE:RTX) are no longer members of the DJIA club. They were replaced by Salesforce (NYSE:CRM), Amgen (NASDAQ:AMGN) and Honeywell International (NYSE:HON). It is interesting to note that this swap marks Honeywell’s return to the index.
The Apple Effect
It sort of made sense when, a couple of years ago, the DJIA removed General Electric (NYSE:GE) in favor of drug store chain Walgreens Boots Alliance (NASDAQ:WBA). GE was bottoming out after years of bad moves and the suffering was sure to bring consequences.
This latest shuffle, though, seems to be fallout from the stock split recently enacted by Apple (NASDAQ:AAPL).
It’s not because Apple is such a large company. Or because the iPhone and other products ushered in major changes in society. No, it’s because the index is driven by share price. And Apple’s 4-for-1 stock split messed up the Dow’s narrow lane. The index needed CRM’s higher share price.
The Bottom Line on Exxon Mobil Stock
I get it that Exxon Mobil and other oil companies are not the most popular, despite the fact we utilize their products each day, every day. The industry, like many others, is working through a downturn brought by effects of the novel coronavirus on the global economy.
Fundamentally, though, Exxon is a strong company that is poised to deliver dividends to shareholders and products to customers. Being a member of the DJIA club doesn’t matter, as David Moadel states in a recent InvestorPlace article.
“Exxon Mobil stock holders should know that the company is working towards becoming leaner and more tech-enabled,” Moadel says.
Exxon Mobil’s departure from the DJIA is noteworthy for several reasons. One is that the company had been part of the Dow since 1928 and was added when the index went from 20 to 30 members.
Exxon Mobil stock is expected to be pressured as long as the company’s customer base, such as the airline industry, is lagging amid the Covid-19 pandemic.
If you are interested in being an energy investor as part of a diversified portfolio, buying Exxon Mobil stock in the dip makes sense – whether or not it is part of the Dow Jones Industrial Average.
On the date of publication, Larry Sullivan held a long position in AAPL.
Larry Sullivan is a veteran journalist in Florida who has covered banking and finance for several years. He is a former investing editor at U.S. News & World Report in Washington D.C.