On Tuesday of this week General Electric, the oldest of the 30 members of the Dow Jones Industrial (DJIA) average was replaced by global drugstore chain Walgreens Boots Alliance. General Electric was one of the original dozen companies which comprised the Dow Jones Industrial Average (DJIA) in 1896. For complete history of DJIA go to http://www.dow-jones-djia.com/history-of-dow-jones-industrial-average-index/.
In hindsight the timing for Walgreens Boots to replace General Electric in the DJIA, the most famous stock index in the world was horrible. GE shares increased by 7.8% on Tuesday after they announced that they would spin off most of their businesses.
On Thursday June 28, Walgreens Boots got out of the wrong side of the bed. The company in its quarterly report before the market open announced that its same store sales had declined versus the year earlier same quarter. It got even worse after Amazon later in the morning announced that it had acquired PillPack a mail order pharmacy with licenses to dispense drugs in all 50 US states. PillPack was a perfect fit for Amazon. It sells and delivers packets of prescriptions drugs to its customers in their homes. It has software that verifies when a refill is due and determines co-pays and confirms insurers. The acquisition is going to enable Amazon to wreak havoc on the drugstore industry. Walgreens Boots shares declined by 9.4% for the day.
My guess is that the stewards of the DJIA probably would not have picked Walgreens had they known about Amazon’s intentions. Its shares will surely be a Dow laggard and will underperform versus all the rest of the 29 members of the DJIA. Amazon will decimate its customer base by providing more convenience and lower prices. The DJIA has a history of replacing its members who have deteriorating fundamentals with companies that have strong fundamentals. It stewards thought that they were doing that when they replaced General Electric.
My prediction is that Boots Walgreen will not last long as a member of the DJIA. More importantly, now that Walgreens Boots is a member of the DJIA will make it all the more difficult for the venerable index to eclipse the all-time high that it made in January 2018. The inability for the Dow to make the new high will be bull fodder for the baby secular bear that was born in January 2018.