Walgreens (NASDAQ:WBA) stock is sinking 2% in early trading after S&P Global announced that the pharmaceuticals retailer would be removed from the Dow Jones Industrial Average (DJIA), effective Feb. 26. Amazon (NASDAQ:AMZN) will replace WBA stock in the Dow Jones index on that day.
WBA Stock Is Out, AMZN Is In
S&P cited two main reasons for its decision. First, it noted that the move was prompted by “the evolving nature of the American economy” and added that “this change will increase consumer retail exposure as well as other business areas in the DJIA.”
Indeed, in addition to Amazon having the world’s largest e-commerce business, it also owns the biggest cloud infrastructure unit, AWS. Moreover, AWS is increasingly becoming immersed in artificial intelligence (AI).
As a result, the addition will greatly increase the Dow’s exposure to three major trends: cloud computing, e-commerce and AI.
Secondly, S&P noted that another Dow component, Walmart (NYSE:WMT), had decided to carry out a 3-for-1 reverse stock split. As a result, WMT’s stock price fell, reducing its weight in the index.
S&P did not explain the connection between Walmart’s decision and the inclusion of Amazon in the index. However, it appears that, following Walmart’s move, S&P wanted to add Amazon to the Dow in order to ensure that the index had sufficient exposure to giant retailers that sell a large variety of products.
Walgreens Has Been Struggling
The retail chain’s net earnings, excluding certain items, sank 43% last quarter versus the same period a year earlier to $571 million. Moreover, it had a huge net debt of $33.9 billion as of the end of last quarter. The firm has had to pay tremendous amounts of money to settle lawsuits related to its role in the opioid epidemic.
To make things worse, Amazon appears to be on the way to disrupting Walgreens and other drugstore chains with its Amazon Pharmacy business. Last month, CEO Andy Jassy reported that the unit was growing very rapidly.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
