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Honeywell
is going back in the
Dow Jones Industrial Average.
It makes perfect sense. And it is good news for the stock, but not in the way investors might initially assume.
S&P Global
(ticker: SPGI) announced the changes Monday evening. The industrial giant is going back in the Dow—after a 10-year hiatus—beginning August 31, along with
Salesforce.com
(CRM) and
Amgen
(AMGN). Leaving the Dow are
Raytheon Technologies
(RTX),
Pfizer
(PFE), and
Exxon Mobil
(XOM). The Dow is price-weighted, which means stock positions are created based on which ones have the highest prices.
Back in 2008, Honeywell (HON) and
Altria
(MO) were replaced by
Bank of America
(BAC) and
Chevron
(CVX), making the Dow Industrial a bit less industrial.
It’s difficult to say which company replaced what in that switch. This time, though, it seems easier to line up the changes: Honeywell appears to be replacing Raytheon. Raytheon Tech, of course, was once United Technologies—the industrial conglomerate with aerospace, elevator, and air-conditioning businesses.
But United Tech broke apart and bought defense giant Raytheon. Including
Boeing,
aerospace and defense looks overrepresented in the index right now.
Still, both Honeywell and Raytheon are officially industrial companies, so the biggest shift from Monday’s announced changes are that the energy sector loses a little ground and information technology picks up some ground.
By market capitalization, more than 50% of the Dow is in information technology stocks, but the Dow is weighted by share prices—not by market cap. By stock prices, technology will be about 30% of the Dow—after the changes. The weighting of industrials will grow slightly to about 14%.
Industrial companies were once the largest portion of the Dow. As recently as 2018, industrial companies made up more than 20% of the index. That changed when
General Electric (GE)
left and was replaced by
Walgreens Boots Alliance
(WBA).
For industrials to approach tech’s weighting, Honeywell stock will have to perform well far into the future. Index addition can drive short-term trading gains. Indeed, Honeywell shares closed up 3.2% Tuesday—after Monday evening’s news. But the trading bump for Honeywell stock will likely be small and short-lived.
After all, the amount of stock that index funds need to buy to keep the right weighting isn’t all that significant. Less than $30 billion of investing funds track the Dow, while more than $11 trillion track the
S&P 500.
The biggest impact on Honeywell stock from its Dow addition might be philosophical. By removing what was once United Tech and including Honeywell, the Dow constructors are likely acknowledging that Honeywell is, essentially, the last giant industrial conglomerate and that they expect Honeywell to be around, in its current form, for years to come.
Industrial companies—such as United Tech—have spent a lot of time splitting up lately. Looking ahead, if conglomerates come back in vogue, Honeywell shares could outperform peers.
Barron’s wrote positively about Honeywell in November 2019. We liked the company’s positioning in its end markets and its use of technology to improve profit margins. Since the article appeared, Honeywell stock, however, is down about 9%, worse than the comparable 11% gain of the S&P 500 and 2% gain of the Dow over the same span.
The impact Covid-19 has had on the aerospace industry is the biggest reason for the underperformance. Air travel has been decimated by the pandemic, and Honeywell’s largest business unit is aerospace.
Aerospace is an important industrial end market—any commercial aerospace recovery will also help Honeywell shares in the future.
Write to Al Root at [email protected]
