Walgreens Boots Alliance became the most recent addition to the Dow Jones Industrial Average in June 2018, when it replaced struggling conglomerate General Electric in America’s most famous stock market indicator.
Its Dow tenure may be among the shortest.
KKR has approached Walgreens about taking it over, Bloomberg reported Monday. If Walgreens winds up getting bought out, the deal could be the biggest leveraged buyout ever. That news follows a Reuters report last week that said Walgreens was talking to private equity firms about a sale. If such a deal happens, that would mean Walgreens would no longer be publicly traded.
In that event, S&P Dow Jones Indices, which selects the stocks for the Dow and S&P 500, would choose a new company to replace Walgreens. S&P Dow Jones Indices was not immediately available for comment about any possible changes to the makeup of the Dow.
If Walgreens is dropped from the Dow what candidates could replace it?
Amazon or Google would need to split to get in the Dow
There’s a case to be made for Amazon or Google owner Alphabet, because of their massive size (each is valued at nearly $900 billion) and their importance to the US economy. However, the Dow, unlike the S&P 500, is weighted by stock price and not market value.
With both Amazon and Google trading for well over $1,000 per share, the only way they could be added to the Dow without having an outsized impact on its performance would be if they split their stock — issuing more shares at a lower price to bring down the stock price. The value of the company wouldn’t change.
Amazon hasn’t split its stock since 1999. Alphabet did so in 2014. Alphabet and Amazon were not immediately available for comment about whether they may split their stocks again.
There’s recent precedent for another giant tech company with a prohibitively high price splitting its stock and then getting selected for the Dow: Apple did so in June 2014, bringing its share price down from nearly $650 to a little over $90. Apple was added to the Dow in March 2015. (Apple stock now trades at around $260, making it the second-largest component in the Dow, behind Boeing.)
Walgreens, which trades at about $63, is the 25th-largest Dow component.
So if Amazon and Alphabet don’t pull an Apple and split their stocks, what other companies could be contenders to replace Walgreens if it is acquired?
Zuckerberg or Buffett to join exclusive Dow club?
Despite recent controversies, Facebook could make sense because of its dominance in social media and advertising. The stock trades at about $190 a share, so it would not be too pricey.
The class B shares of Warren Buffett’s Berkshire Hathaway might be a good fit, too. They trade at a little more than $220 (compared to the more than $330,000 price tag for one Class A share) and would make sense as a Dow component due to the company’s exposure to the financial services sector via its Geico business and numerous industrial and energy subsidiaries.
Berkshire Hathaway also is a big investor in several Dow components. Apple is the firm’s largest stock holding while Dow companies Coca-Cola, JPMorgan Chase, American Express, Goldman Sachs, Visa and Travelers are also top Buffett stock picks.
Several other megacap companies could make sense as Dow additions.
CNN parent AT&T, which was booted in 2015 to make place for Apple, is a possibility because of its string of media acquisitions to boost its market value in the past few years. The same could be said for cable giant Comcast, the owner of NBCUniversal.
Coke rival Pepsi, which generates more sales than Coke thanks to its booming snack food business, could be a good Dow fit too.
If the Dow wanted another tech company, software giant Oracle could make sense because of its growth in the cloud and annual sales of more than $40 billion.
Costco would be a possible Dow contender too if the index makers wanted to replace Walgreens with another retailer. The company’s $133 billion market value is just below that of Dow component Nike.
But if Walgreens does go private, the cleanest substitution might be to replace it with its top rival, CVS. That drug store chain also owns insurer Aetna, a competitor to Dow component UnitedHealth.
And at a stock price of about $72, it would also hold a similar position in the Dow ranks as Walgreens does now. CVS would be the 23rd largest component, just above Exxon Mobil and below Big Pharma giant Merck.