Meanwhile, oil company Exxon Mobil, pharmaceutical company Pfizer and defense and aerospace group Raytheon are no longer in the Dow. This switch is owed to Apple’s stock split, also taking place on Monday, in the wake of the recent all-time high.
The iPhone manufacturer’s share prices have recently climbed rapidly, making stock market history: it is the first time a US company is worth over two trillion US dollars on the stock market. In view of this rise in the share price, Apple now wants to split its shares into smaller units.
Each holder of an “old” Apple share will receive four new shares. The number of shares thus quadruples, and the share price is divided by four in return. With such splits, companies want to make shares that have risen sharply easier to trade. They also make the shares psychologically more attractive. Many small investors shy away from buying shares worth several hundred dollars.
Apple’s weighting drops to a quarter
However, the split also reduces the weighting of Apple shares in the Dow Jones to a quarter of its previous value. This is because the second-oldest US stock market index is relatively simple and designed as a so-called price index. In other words, the index is basically an arithmetic average of all the contained share prices. Only a correction factor for the index as a whole ensures that the Dow does not have a “bend” in its curve when changes occur.
As opposed to other known stock indices, market capitalisation, dividends, stock splits and the like are not taken into account by appropriate correction or weighting factors for the individual shares. The absolute share prices are the only factor in the Dow’s weighting.
With the soaring Apple share, its weighting in the Dow has also risen rapidly to around 12 per cent, making it by far the most important stock in the index. With the stock split, not only Apple’s weighting, but also the weighting of the IT sector in general in the Dow would drop sharply. In order to close this gap, index operator S&P Dow Jones has decided to make the index changes coming into effect on Monday.
Changes aim to ensure the booming IT sector’s relevance in the index
According to S&P, swapping out several companies and including Salesforce should compensate for the Apple split and ensure that the Dow continues to be a good reflection of the US economy, in which the relevance of certain industries has changed significantly over time. The corona crisis with its quarantine measures and home office working, has further strengthened the IT company boom, as evidenced by the technology-oriented Nasdaq index recently reaching new record highs, while shares in traditional industries have performed significantly worse.
The shares of Dow newcomer Salesforce have already gained around 70 per compared to the start of the year. Salesforce dominates the US customer management software (CRM) market and, with its cloud solutions, has been able to profit strongly from the home office trend.
Companies must now increasingly rely on cloud-based computing capacity and applications so that employees can interact remotely. The company raised its business outlook just a few days ago. It now expects revenues of between USD 20.7bn and 20.8bn for the current financial year (to January 2021), an increase of up to 22 per cent.
Biotech group Amgen may also benefit handily from the corona crisis, raising its annual forecast after a surprisingly good quarter. In Q2, Amgen’s sales increased by 6 per cent to USD 6.2bn despite the corona pandemic. The company also wants to get involved in the race to profit from a potential corona virus drug.
Food delivery company Hero replaces Wirecard in the DAX
Not only the Dow, but also the DAX has recently undergone a change. For the past week, German food delivery service Delivery Hero has been included in the German leading index, replacing payment processor Wirecard, which went bankrupt due to a financial accounting scandal.
As in the IT sector, food delivery services are among the beneficiaries of the corona pandemic. Thanks to the order boom during the corona crisis, segment sales revenues at Delivery Hero rose by 94 per cent to almost EUR 1.1bn in the first half of the year. However, the company, which was founded in 2011, is still in the red and its current business is not yet covering its costs.
Delivery Hero operates meal ordering platforms from local suppliers in more than 40 countries. Despite the losses, the delivery service continues its buying spree around the world and recently took over the online food marketplace Instashop from Dubai.
Legal note:
Prognoses are no reliable indicator for future performance.