There’s simply not a stock market index on the planet that has more history behind it than the iconic Dow Jones Industrial Average (DJINDICES:^DJI). The Dow has been a mainstay on Wall Street for more than 124 years, and today houses 30 well-known, time-tested U.S. multinational companies.
But this widely followed index is flawed. Whereas other major indexes, such as the broad-based S&P 500, are weighted by market cap (i.e., larger companies exert more weight within the index), the Dow Jones is a price-weighted index. In other words, only a company’s share price matters in calculating the point fluctuations within the index.
Thus, when tech kingpin Apple (NASDAQ:AAPL) chose to split its stock 4-for-1 on Aug. 31, it went from being the Dow Jones’ most influential stock by a mile (Apple’s share price was nearly $500) to its 20th-most important stock as of this past weekend. In fact, one of the interesting quirks of this price-weighted model is that the index’s seven-largest components by market cap, including trillion-dollar stocks Apple and Microsoft, aren’t among the Dow’s five most-important stocks.
As of this past weekend, the Dow Jones’ top five stocks in terms of weighting are as follows.
With a closing price of $301.48 a share, health-benefits provider UnitedHealth Group (NYSE:UNH) is the storied index’s most important stock. Based on the new Dow divisor of approximately 0.152, which was implemented after Apple’s stock split and the arrival of three new components, UnitedHealth is responsible for 1,983.59 Dow points. On a percentage basis, it controls almost 7.2% of the index.
Having UnitedHealth anchor the Dow Jones’ certainly isn’t the worst thing that can happen. This is a company that’s delivered a positive total return for 11 consecutive years, including five years in the past 11 where total returns, including dividends, hit at least 36%. UnitedHealth Group has never had an issue growing its user base, increasing premiums as needed, and supplementing its core health insurance business with Optum, which provides data analytics and pharmacy-benefit management services.
The second-most important Dow stock is do-it-yourself home improvement giant Home Depot (NYSE:HD). The company’s $276.33 closing price last weekend means it’s responsible for 1,818.12 points in the index. On a percentage basis, Home Depot accounts for almost 6.6% of the Dow’s total point value.
After going virtually nowhere between 1998 and 2011, Home Depot’s stock has been on a tear since 2012. Historically low lending rates for the past decade have encouraged new construction and the remodeling of existing homes. With the Federal Reserve expected to keep lending rates low until at least the midpoint of this decade, the boom for Home Depot may not be over.
Furthermore, Home Depot has benefited greatly by investing in technology within its stores to improve its supply chain and enhance the experience of its customers.
Surprise! The Dow’s third-most important stock just happens to be one of its newest additions. With a share price of $243.21, biotech blue chip Amgen (NASDAQ:AMGN) is responsible for 1,600.20 Dow points, equating to almost 5.8% of its total points.
Brand-name healthcare stocks are generally a safe place for investors to park their money because they’re highly defensive and often pay a dividend. No matter how poorly the U.S. economy performs, companies like Amgen would be expected to see little change in demand for pharmaceutical and biosimilar products. After all, we don’t get to decide when we get sick or what ailment(s) we develop.
Although the second quarter represented one of the worst quarters on record for the U.S. economy, Amgen’s sales rose 6% from the prior-year period, with sales from recently acquired psoriasis drug Otezla more than offsetting revenue declines in its more mature therapeutics.
Actually, make that two new additions to the Dow Jones Industrial Average having a lot of influence over the index. Software-as-a-service enterprise cloud solutions provider salesforce.com (NYSE:CRM) is the index’s fourth-most important stock. Its closing share price of $243.10 means it accounts for 1,599.48 Dow points, or virtually the same amount as Amgen.
When Apple split its stock, the Dow’s technology weighting dropped considerably. The addition of salesforce.com helped to boost the index’s exposure to high-growth tech.
Though the Dow is typically made up of stodgy dividend-paying companies, salesforce.com is nothing of the sort. Fiscal second quarter sales surged 29%, and the company actually upped its full-year sales guidance to now call for 21% to 22% revenue growth. With so many business moving online as a result of the coronavirus disease 2019 (COVID-19) pandemic, salesforce.com’s customer relationship management solutions have become more important than ever before.
Finally, the fifth-most important Dow Jones stock is the Golden Arches, McDonald’s (NYSE:MCD). After closing at $218 on the nose this past weekend, McDonald’s is credited with 1,434.33 Dow points, or just shy of 5.2% of the index’s value.
McDonald’s is the type of company most people would associate with the Dow Jones. It’s a very well-known brand-name company with global appeal that investors can buy for the very long-term and not have to worry about.
Of course, even industry giants face competition. America’s push toward healthier eating habits has required McDonald’s to rework its menu on more than one occasion. McDonald’s is angling to introduce products that’ll bring former customers back to the chain, while at the same time keeping popular value items that lure in longtime consumers. But with its stock having tripled over the past decade, there’s not much for investors to complain about.
On a combined basis, UnitedHealth, Home Depot, Amgen, salesforce.com, and McDonald’s account for almost 8,436 Dow points, or 30.5% of its total weighting.
The Dow Jones’ 5 Most Important Stocks – Motley Fool