Before its earnings report sent shares up more than 8%, Alphabet’s Class A shares closed at $2,753. (These shares, which were the main class of shares for Google until 2012, trade at a slight premium to its newer Class C shares, which carry no voting rights.)
Split-adjusted, that would be equivalent to $137.64.
IBM‘s closing price on Tuesday was $135.53. With IBM’s recent spin-off of its managed infrastructure business, Kyndryl, and its data and analytics business for health care companies, Watson Health, Big Blue is shrinking. And even before the spinoffs, IBM was plagued by growth issues for years.
Could IBM be a candidate to be removed from the Dow? Maybe. If so, would the index committee look at a stock with higher growth potential like Alphabet.
The stock split perhaps allows for that discussion to take place. For years, Alphabet’s high price made it impossible for the stock to be eligible in the price-weighted Dow Industrials. After the stock split though, Alphabet theoretically could be swapped out for IBM without little impact to the index since both are around the same stock price.
Would Alphabet’s share class situation complicate its eligibility? That’s something the index committee would have to decide.
It’s also worth noting that while many investors think of Alphabet as a tech stock, for indexing purposes, S&P Dow Jones categorizes it in the Communications Services category. IBM is a pure-play tech stock though and through.
So trading IBM for Alphabet would shake up the sector weightings in the Dow – another factor the committee would have to evaluate. Arguably, it would be a compelling opportunity to give the under-represented Communication Services sector more influence. According the latest S&P DJ Indices Factsheet, the sector has a tiny 3.7% weighting in the Dow (third smallest in the index currently) compared to 22.2% for Tech.
Compare that to the S&P 500, in which Communication Services makes up 10% of the index, while Tech is 29%.
The last major tech company to join the Dow was Apple, which was added in Mar. 2015 — a mere nine months after completing a 7-for-1 split, the fourth split in its history. (It since completed another 4-for-1 split in 2020.)