Oil company Exxon Mobil says goodbye to the Dow Jones … a sign of the times?

Exxon Mobil has been a part of the Dow Jones since 1928, but its tenure as a longest-serving member is coming to an end.

  • On Monday, the S&P and Dow Jones indices announced the largest benchmark changes of 30 stocks in seven years.
  • Exxon to be replaced by Salesforce. Amgen and Honeywell International are replacing Pfizer and Raytheon Technologies.

The elimination of Exxon is a "sign of the times," Raymond James said, as the company – and the energy sector in general – falters, a weakness that is made more apparent by the strength of the technology names.

Pippa Stevens commented on CNBC that the energy sector now represents only 2.5% of the S&P 500, compared to 6.84% five years ago years, and 10.89% from ten years ago. Technology has jumped from 18.48% of the index in 2010 to 28.17% today.

Jennifer Rowland of Edward Jones noted that five technology stocks – Apple, Microsoft, Amazon, Alphabet and Facebook – are individually larger than the entire industry. energy sector, which she called “quite sobering” and “symbolic of how much the energy sector has fallen in recent years.”

Chevron is also in the Dow, which means that the sector energy was initially overrepresented in the benchmark. And with Apple's upcoming 4-for-1 stock split, the Dow's exposure to technology was destined to decline.

By removing Exxon from the DJIA, the index provider is clearly reacting, and actually heightening sentiment. extremely negative from investors in almost everything oil and gas.

Raymond James's Pavel Molchanov in a note to clients

Exxon shares fell 3% on Tuesday after news of the recall

This represents a combination of the obviously harsh oil price backdrop impacted by COVID, but also concerns about the eventual spike in oil demand (which had arisen long before COVID) and objections related to the ESG to fossil fuels in general. That said, Raymond James is optimistic about the sector and expects a recovery in 2021.

Over time, the S&P 500 has overtaken the Dow in importance as it better reflects the market and the economy. Not only does it contain hundreds of additional stocks, but it is also weighted by market capitalization, which means that larger companies have more influence. The Dow, on the other hand, is price-weighted.

Approximately $ 24 billion in actively managed funds follow the Dow, dwarfed by the more than $ 300 billion that follow the S&P 500, according to data from Goldman Sachs. The gulf in the passively managed funds that follow each one is even deeper.

Still, the elimination of Exxon is significant.

As recently as 2013, Exxon ruled the S&P 500 and the broader market as America's largest publicly traded company. In 2007 its market capitalization peaked at $ 500 billion, but since then it has been slowly declining. In the past five years, shares have dropped nearly 40%, and the company is now valued at $ 178.5 billion, according to FactSet data. Salesforce, on the other hand, has seen its shares jump nearly 220% in the last five years, and currently has a market capitalization of about $ 187.5 billion.

This action does not affect our business or fundamentals. long-term that support our strategy.

Our portfolio is the strongest it has had in more than two decades, and our focus continues to be creating shareholder value by responsibly meeting the world's energy needs. [19659009] Exxon

Why Exxon and not Chevron

Chevron shares, while also struggling this year, have returned about 25% in the last five years. Its share price is currently slightly more than double that of Exxon. While this is not relevant to investing in general, it is relevant to the price-weighted Dow. But that is probably not the only reason Exxon took the hit rather than Chevron.

Molchanov noted that Chevron is " positioned much more directly as an oil producer " with a " high degree of operational influence on commodity prices “. Exxon's vertical integration, on the other hand, means strong exposure to refining and chemicals.

The index committee probably wanted to maintain some exposure to oil, making Chevron the best option to do so, especially given that the chemical giant Dow Inc.… already represents the chemical industry in the index.

Goldman's Neil Mehta added that Chevron is a better fit than Exxon for three reasons: higher free cash flow generation, a stronger balance sheet, and better operating and earnings execution. The company has a buy rating from Chevron and a sell rating from Exxon.

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