Bye Bye Walgreens, Hello Amazon
Bryan Taylor, Chief Economist, Global Financial Data
S&P Dow Jones Indices has replaced Walgreens Boot Alliance with Amazon in the Dow Jones Industrial Average (DJIA). This is the first change in the DJIA in three-and-a-half years.
The Amazing Amazon
When Walgreens was put in the DJIA on June 26, 2018, the price of Amazon stock was too high for inclusion in the average. In June 2018, Amazon was around $1700 per share and since the DJIA is an average of stock prices, its price would have been equal to most of the other twenty-nine stocks put together. However, on June 6, 2022, Amazon did a 20-for-1 stock split bringing the price of Amazon stock down from 2447 to 124.79, making it eligible for inclusion in the DJIA. Several stocks have been added to the DJIA after they split to a more reasonable price. Apple got added to the DJIA in 2015 after a 7-for-1 split.
Amazon’s inclusion in the DJIA occupies a similar place to that of Sears, Roebuck & Co., which was a member of the DJIA from January 22, 1924 to October 31, 1999 and Woolworth’s (now renamed Foot Locker), which was a member from May 12, 1924 to March 16, 1997. Woolworth’s was replaced by Wal Mart, Inc., and Sears by Home Depot, Inc., both of which are still members of the DJIA.
Figure 1 shows the performance of Amazon stock since its debut in May 1997 when it IPO’d. Amazon had three stock splits in 1998 and 1999 totaling twelve-to-one and the 2020 stock split of twenty-to-one produced a cumulative stock split of 240-to-1. The stock has risen in price from the equivalent of one dime in May 1997 to $178 today. That means the stock has provided an annual return of 33% over the past twenty-six years. The only real decline was during the 2000 bear market when the stock fell from a peak of 113 in December 1999 to under $6 in December 2001, a 95% decline. Since then, the stock has risen 600-fold, rising at an annual rate of 33% per annum. It is no wonder that Jeff Bezos is the richest man in the world.
Figure 1. Amazon Stock Price, 1997 to 2024
The Decline of Walgreens
And how has Walgreens done since it was added to the Dow Jones Industrial Average? Very poorly.
Walgreens has been around since 1909, and its stock has traded since 1928. It changed its name to Walgreens Boots Alliance on December 31, 2014, when it took a 55% stake in Switzerland-based Alliance Boots. After the acquisition, the stock rose to 96 in July 2015, but it has been downhill ever since. The stock is now around $21 a share, having lost 78 percent of its value. The market cap of Walgreens is now about $18 billion, much smaller than Amazon’s $1.8 trillion. Although market cap is not important in the Dow Jones Industrial Average, the fact that Amazon is one hundred times the size of Walgreens was no doubt a factor in the decision to replace it. The relative performance of Amazon and Walgreens is compared in Figure 2. S&P Dow Jones Indices probably regrets ever adding Walgreens to the Dow.
Figure 2. Amazon Stock Price and Walgreens Boots Alliance Stock Price, 2018 to 2024
Who’s next?
The DJIA doesn’t include stocks based purely on market cap, but it has to take the price of the stock into consideration because the DJIA is a price average. Stocks with a very high or low price are excluded from consideration. When the DJIA was introduced in 1896, stocks traded at 100 par, so all stocks were in the running. But today with some stocks trading over $1000, price must be considered. ExxonMobil was probably removed from the DJIA in 2020 rather than Chevron because its price was lower than Chevron’s price. Of the largest companies in the United States now, the price of Nvidia, Meta Platforms, Berkshire Hathaway, Eli Lilly, and Broadcom are too high to be included in the DJIA while Tesla is too volatile and unproven.
The main large cap stock that might qualify for future inclusion in the DJIA is Alphabet (Google). Its stock price is under 140 which is less than Amazon’s. Alphabet also had a 20-for-1 stock split in 2022. Alphabet is currently the fifth-largest company in the United States. Both 3M and Dow Inc. have a market cap of $50 billion or less, so they would be the most likely candidates to be removed, but replacing a mining or chemical company with a tech company seems unlikely.
It will probably take some event that forces a company out of the DJIA to get Alphabet in, but when that happens, Alphabet can be waiting in the wings.
