It must hurt to get kicked out of your own club.
The ouster of General Electric Co. from the Dow Jones Industrial Average after more than a century shows just how far the one-time corporate titan has fallen. While the move doesn’t change GE’s fundamental outlook, the expulsion of the gauge’s last original member piles on yet another humiliation as chief executive officer John Flannery searches for a path forward.
“Symbolically, this indignity marks GE’s fall from grace,” Deane Dray, an analyst at RBC Capital Markets, said in a note. And since some investment portfolios track the Dow, “there will likely be technical selling pressure as those funds adjust for this change in the index composition.”
Although the move had been anticipated by some investors, it’s still a painful blow to GE amid one of the worst slumps in its 126-year history. The shares have lost more than half their value in the past year as the Boston-based company struggled with a litany of problems, from cash-flow obstacles and weak demand for industrial equipment to grumblings from an activist investor and an accounting probe by securities regulators.
Mr. Flannery, who took the helm from long-time CEO Jeffrey Immelt last year, has already cut costs, overhauled the board and sold the century-old locomotive business as he attempts to reduce GE’s complexity. He’s considering bigger changes, as well, including a possible breakup into separately traded entities.
The stock had tumbled 26 per cent this year through Tuesday, by far the worst among the 30 Dow components.
By dropping GE in favour of Walgreens Boots Alliance Inc. next week, the Dow’s change will mirror a shift in the U.S. economy from industrial activity to services. Overseers of the index said the decision reflected a growing emphasis on consumer and health-care businesses.
The change removes the sole surviving debut member from the benchmark formed in 1896, with GE going the way of U.S. Rubber, National Lead and Tennessee Coal & Iron. GE briefly left the benchmark in its early years but has been a continuous member since 1907.
Once the most valuable U.S. company, GE has long been seen as a model of corporate excellence. Under Mr. Immelt and legendary CEO Jack Welch, the company pioneered widely used business practices such as Six Sigma and produced executives who went on to run industry giants including Boeing Co.
That reputation has collapsed in recent years, after the financial crisis nearly toppled the company and it struggled with a reinvention around technology.
GE brushed off the Dow announcement, saying that the company remained focused on improving performance and that the news did “nothing to change those commitments or our focus in creating a stronger, simpler GE.”
While removal from the stock benchmark is “likely to drive near-term underperformance in the shares,” it may signal improvement in the long run, according to Goldman Sachs analyst Joe Ritchie. Stocks that recently have been removed from the gauge typically have outperformed the rest of the Dow over the next 12 months, he said in a note.
GE could certainly use a rebound. It has, after all, lost about US$140-billion of market value in the last year.