End of an Era

Posted on June 20, 2018 by Gemmer Asset

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Nothing lasts forever.  Tuesday afternoon we learned that General Electric, an original member of the Dow Jones Industrial Average, will be kicked out effective June 26th.   It will be replaced by Walgreens Boots Alliance.

 

Wow!!   GE was an original member of the Dow in 1896 and has been in it continuously since 1907.  The company has been struggling the last few years, it replaced its CEO recently, and slashed thousands of jobs while cutting the stock dividend in half.

 

Last year the stock lost almost half its value.  Over the trailing five years GE has lost 44% while the S&P has gained almost 77%.

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In part GE’s low price is partially behind it’s removal.  After all, the Dow is a price weighted index, and at today’s level it constitutes less than 0.5% of the Dow.

 

For some reason this seems like the end of an era.  How many years was a GE considered a ‘widows and orphans’ type stock.  Buy it and forget about it, so to speak.

 

But looking back in history this is pretty much par for the course.

 

Charles Dow put his index together back in 1896 with 12 holdings.  How many of these are common names today?

 

American Cotton Oil – Ancestor of Best Foods, now part of Unilever.

 

American Sugar – Became Amstar in 1970 and subsequently Domino Foods.

 

American Tobacco – Broke up into separate businesses in 1911, expanded beyond tobacco and renamed itself American Brands; now Fortune Brands.

 

Chicago Gas – Absorbed by Peoples Gas, which replaced it in the Dow in 1898. Now part of Integrys Energy.

 

Distilling & Cattle Feeding – After a series of deals became National Distillers, then sold liquor assets to Diageo and fellow Dow component progeny American Brands. Rest of business now part of Millennium Chemicals.

 

General Electric

 

Laclede Gas – Still around, as the primary subsidiary of the Laclede Group.

 

National Lead – Changed its name to NL Industries in 1971, 83% owned by conglomerate Valhi. Once known for mining, moved into paints (Dutch Boy brand), pigments and coatings. Sold paint business in 1970s.

 

North American – Dissolved by a federal court in 1938, surviving successor became Wisconsin Electric, part of Wisconsin Energy.

 

Tennessee Coal Iron and RR – During the panic of 1907, TC&I was acquired by U.S. steel, with banker J.P. Morgan playing a key role in arranging the merger.

 

U.S. Leather – The only preferred stock in the original Dow, U.S. Leather is also the only company to have vanished with nary a trace since the trust was dissolved in 1911.

 

United States Rubber – Merged first into Uniroyal in 1950s then with B.F. Goodrich in 1986. Resulting company was bought by France’s Michelin in 1990.

 

 

Couple observations:

 

1) Anyone who says index investing is passive is out of their mind. Indexes are built by committee.  Eliminating GE is really no different from an active manager choosing to sell a stock based on fundamentals.  And I’d be willing to bet that GE might actually outperform the Dow over the next five years.

 

2) A few days ago Rob Arnott pointed out that today’s dominant tech companies such as Facebook and Google are unlikely to be so dominant ten years from now (read more here).  While tough to believe, he points out that the only company in the 2008 top ten list to still be in the 2018 top ten list is Microsoft, as you can see below.

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If nothing else, this should caution us all about extrapolating performance into the future.

 

 

Charles Email Sig

 

 

 

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