For more than 127 years, the Dow Jones Industrial Average(DJINDICES: ^DJI) has been one of Wall Street's top barometers of stock market health. What began as an index that featured 12 predominantly industrial companies in the late 1800s is now comprised of 30 multinational businesses from a variety of sectors and industries.
However, the Dow Jones isn't without its flaws. Specifically, it's a share price-weighted index, not a market cap-weighted index like the S&P 500 and Nasdaq Composite. In simple terms, the higher a component's share price, the more influence it has within the Dow.
Image source: Getty Images.
For instance, Apple's $175 share price only has a little more influence within the Dow than property and casualty insurer The Travelers Companies, whose shares trade at roughly $165. Yet, Apple's market cap of $2.74 trillion dwarfs Travelers at $38 billion.
Because share price is so important within the Dow Jones Industrial Average, components tend to move in and out with some degree of regularity. Since 1896, the Dow has undergone more than 50 changes -- and the next round of changes may be on their way.
There are currently three Dow components that appear to be in danger of being kicked out of the iconic index. Meanwhile, there are a number of top-performing businesses that could easily take their place.
Dow stock No. 1 that could get the boot: Walgreens Boots Alliance
The most logical replacement candidate within the ageless Dow is pharmacy chainWalgreens Boots Alliance(NASDAQ: WBA). Since being added to the Dow in June 2018, shares of Walgreens have fallen 66% as of Sept. 15. Its current share price only accounts for 147.51 of the Dow's 34,618-point index value.
Even though I'm a fan of Walgreens and have been aggressively adding it to my portfolio in recent weeks, having CEO Roz Brewer step down, as well as contending with increased theft and weaker customer traffic, are all tangible concerns. Despite having a turnaround plan in place that promotes higher-margin healthcare services and reduces the company's annual operating expenses, it could take years before Walgreens really starts to light things up in the earnings column.
The big question is, "What company should replace Walgreens?" Though CVS Health(NYSE: CVS), which owns health insurer Aetna, might be the first name investors think of, remember that the Dow already has health insurance representation from UnitedHealth Group. Additionally, pharmacy chains aren't really the growth juggernauts they once were.
It would make far more sense for S&P Dow Jones Indices, the joint venture owned by S&P Global and CME Group that oversees changes in the Dow Jones Industrial Average, to add a leading medical-device company to the mix, like Medtronic(NYSE: MDT), or even a dark-horse candidate like Intuitive Surgical.
While Dow component Johnson & Johnson does have a world-leading medical technologies segment, Medtronic is almost exclusively focused on implantable cardiovascular devices, diabetes pumps and glucose monitoring systems, and an array of surgical solutions. It would be a logical and economically representative addition to the Dow, considering the aging American population and improving access to medical care.
Dow stock No. 2 that could get the boot: Verizon Communications
A second Dow stock that could get kicked to the curb due to both its low share price and poor performance is telecom stockVerizon Communications(NYSE: VZ). Since being added to the Dow in April 2004, Verizon's shares have gained precisely... 0.53% (insert frowny face here). To boot, its $33.79 closing price, as of Sept. 15, accounts for just 222.32 Dow points.
While telecom companies still play a vital role in providing wireless services, internet access, and a way to buy smartphones from a retail perspective, their growth heyday has long since passed. With rival AT&T getting kicked out of the Dow in March 2015, Verizon's poor stock performance, high debt levels, and constrained growth rate could lead it to the same fate sooner than later.
While T-Mobile(NASDAQ: TMUS) has been seemingly running circles around Verizon and AT&T since closing its merger with Sprint, replacing one telecom company with another doesn't seem like the prudent route to go for S&P Dow Jones Indices. As noted, telecom companies don't bring much to the table in terms of growth.
With no like-for-like replacement for Verizon, my best guess is for Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOG) or Meta Platforms(NASDAQ: META) to get the nod. These are, after all, two of the biggest publicly traded companies.
Alphabet conducted a 20-for-1 forward-stock split last year, which means its share price is no longer prohibitive to being added to the Dow. Alphabet owns the world's leading search engine (Google); operates Google Cloud, the world's No. 3 cloud infrastructure service; and owns YouTube, the second-most visited social site globally.
Meanwhile, Meta Platforms holds the top social media real estate in the world: Facebook, Instagram, WhatsApp, and Facebook Messenger. In the June-ended quarter, Meta's family of apps attracted nearly 3.9 billion unique visitors. Either Meta or Alphabet would give the Dow a premier company driven by advertising dollars -- and ad dollars are a key measure of economic health.
Image source: Getty Images.
Dow stock No. 3 that could get the boot: Intel
The third stock that could be kicked out of the Dow is semiconductor companyIntel(NASDAQ: INTC). Since being added to the Dow at the beginning of November 1999, shares of Intel are, like Verizon, effectively flat (down 0.32%). The company's $37.88 share price, as of Sept. 15, accounts for only 249.23 Dow points.
Intel's muted performance is a reflection of modest market-share losses to key rivals, as well as its struggle to pivot to a cloud computing-driven environment. Though its legacy segments still generate boatloads of operating cash flow, central processing units (CPUs) in personal computers simply aren't the growth driver today that they were in the late 1990s.
Should Intel be shown the door by S&P Dow Jones Indices, two outperformers could easily take its place. Rival Advanced Micro Devices(NASDAQ: AMD) would be a logical horizontal shift. AMD has been steadily chipping away at Intel's CPU share, as well as expanding its products into high-compute data centers and gaming. It's been a genuine growth story, while Intel has lagged.
The other likely replacement is Nvidia(NASDAQ: NVDA), which has more than tripled in 2023 due to excitement surrounding artificial intelligence (AI). Nvidia's A100 and H100 graphics processing units dominate AI-accelerated data centers, and a significant uptick in production capacity from chip fabrication company Taiwan Semiconductor Manufacturing should allow Nvidia to satisfy more demand in 2024.
If S&P Dow Jones Indices wants to add more of a growth component to the Dow Jones Industrial Average, it could side with Nvidia. However, AMD provides a pretty safe pivot to what Intel brings to the table, but with rosier growth prospects and a leg up in AI-accelerated data centers.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sean Williams has positions in AT&T, Alphabet, CVS Health, Intel, Intuitive Surgical, Meta Platforms, and Walgreens Boots Alliance and has the following options: long June 2025 $13 calls on AT&T. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Apple, Intuitive Surgical, Meta Platforms, Nvidia, S&P Global, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends CME Group, CVS Health, Intel, Johnson & Johnson, T-Mobile US, UnitedHealth Group, and Verizon Communications and recommends the following options: long January 2023 $57.50 calls on Intel and long January 2025 $45 calls on Intel. The Motley Fool has a disclosure policy.