The uncertainty and risks in the stock market not only affect the investors but also the companies listed in the market. If the company is not performing well, and are unable to attract traffic towards them, then they are in danger of getting kicked out. This leads to fall in the stock price and can have an impact on the index. Hence, it is necessary to do justice to the exchanges where you are listed.
About Dow Jones Industrial Average:
DJIA is a stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States. The second oldest U.S. market was created by Charles Dow and Edward Jones. The Dow is price-weighted so stock positions are created based on which ones have the highest prices. In this, the sum of the component stock prices is divided by a Dow divisor, which is continually adjusted in order to give a consistent index by avoiding effects of dividends paid or corporate spinoffs. Some of the companies falling under this index are Apple, Microsoft, Nike, American Express, Exxon Mobil, among others.
About Exxon Mobil:
Exxon Mobil is an American multinational oil and gas company and is one of the world’s largest companies by revenue. The company has performed very well in its past and was ranked ninth, globally in the Forbes Global 2000. Exxon has been the part of Dow since 1928 and is considered to be the oldest member of the Dow Jones family. But this oldest company has become very weak to fight with the other growing teach giants and companies which are able to cater more to the change in preferences of the consumers. With this being one of the factors, Exxon Mobil, Pfizer and Raytheon have been replaced with Salesforce, Amgen and Honeywell International.
Reasons for the exit of Exxon Mobil:
Apple’s stock is dominating the index and this tech giant has reached a valuation of $ 2 trillion. In order to bring down the price per share, the company planned to split the stock. This has created a problem for the Dow since price being lower for one stock will also lower the numerator through which the index is calculated. To solve this problem of losing out the total value of stocks, the indices decided to add tech company, Salesforce, a biotech company and a manufacturing company. This is one of the reasons why Exxon has to be removed in order to have a higher value stock.
Another major reason has been the struggles faced by the oil companies. The sector was already facing issues regarding the low demand. Moreover, Coronavirus further increased the problem of the sector by lowering it to the below expectations mark. This is evident from the performance of the world’s biggest company, Exxon Mobil in 2011. Since then, it has dropped drastically from worth $525 billion in 2007 to $450 billion in 2014. It did not stop till 2014 and has declined last six years before 2020 and is now 40% down.
In today’s era, the advancement of tech giants has made them a better stake for any of the investors and indices. Moreover, bad performance on the part of oil sectors has also led to the oldest member to leave the indices.
Impacts on the Company:
Stocks of the affected companies were quick to price in the shake-up. Shares of Exxon dropped 2%, in after-hours trading, while Raytheon fell 3%. Honeywell climbed 3.5% and Salesforce.com rose 4%. Pfizer dropped 1.9% and Amgen rose 4%.
Though oil and energy sector are struggling, but the shakeup in the Dow isn’t just about the troubles of the energy industry broadly. It’s about the turmoil at Exxon specifically.
When US stocks bottomed out on March 23, Exxon was trading at the weakest level in nearly 18 years. Although Exxon has since rebounded along with the broader market, it remains down more than 40% this year. By contrast, Chevron is only down 28%.
Exxon has proudly raised its dividend for 37 consecutive years, making the company a member of the dividend aristocrat group. But analysts said that their streak is now in jeopardy.
Last year, Exxon relied on asset sales and borrowing to cover 64% of its dividend payout, according to the Institute for Energy Economics and Financial Analysis. That’s well above the company’s 10-year average of 30%.
“Historically, Exxon was arguably the most efficient company in the oil and gas space. The dividend, which was very manageable for them when cash flows were stronger, has become more of a burden,” said CFRA’s Glickman.
Exxon’s ousting is another blow to sentiment towards a sector that has been under intense selling pressure while losing relevance with the investment community over the past six years. That’s alongside on-going concerns about an eventual peak in oil demand, which has emerged before the pandemic and ESG-related objections to fossil fuels. As to why Exxon and not Chevron (the only oil company in the Dow Jones Industrial Average now) is being removed, it may stem from the fact that Chevron’s share price is twice as high, since the DJIA incorporates share price in its weightings. Fundamentally, Chevron is positioned much more straightforwardly as an oil producer: a high degree of operating leverage to commodity prices, and by contrast limited exposure to refining and almost none to chemicals.
Even after this loss, Exxon has been a good player in the market and has the advantage of being the most experienced. Now, the oldest member has to come up with a better version of itself and prove the DJIA’s decision of removing them as wrong.