Apple (NASDAQ:AAPL) stock is moving around at a pretty good clip of late, mainly due to some whispers going around (and getting louder, by the way) that with Kraft (NASDAQ:KFT) about to leave the Dow Jones Industrial Average once it follows through with its plan to split up its company, there will be an opportunity for Apple to jump into the Dow. And why not? It is, after all, the largest company in the market (by a long shot) in terms of capitalization. Maybe the Dow hasn’t been as “accurate” when the markets’ largest company isn’t included.
A lot of the talk surrounding Apple has been whether it should even be considered, and if so, would the company willingly split up its stock in order to fit in the complex Dow index formula? That seems to be an interesting question, and the idea of a stock split is partly what has generated some new growth in Apple stock (at least, that’s the belief instead of very early hype over the release of the iPhone 5 in October).
One article explores the impact Apple could have on the Dow index should it join the 30-member composite as a replacement for Kraft. As one can see in the chart at thee bottom of the page, if Apple joined the DJIA but did not split its stock, the Dow would weight Apple stock as more than one-fourth of the average, while Kraft wasn’t even 2.5 percent of the average. Most indications are that the Dow would not want one company to weight the average so heavily to where it overwhelms a large percentage of the other 29 companies in the index. If Apple did not split its stock, not only would be weighted twice as heavily as any other stock (IBM is weighted 11.4 percent currently), but as a prospective 26.7 percent weight on the index, Apple would be heavier than 17 of the other 29 companies.
And combined with IBM (NYSE:IBM) and Microsoft (NASDAQ:MSFT) – let’s exclude other Dow tech stocks like Intel (NASDAQ:INTC), Cisco Systems (NASDAQ:CSCO) and HP (NYSE:HPQ) for now – and the technology sector would make up more than 36 percent of the index – just in three companies!
So certainly it would make sense that if the Dow approached Apple as a possible replacement for Kraft, it’s very likely that Apple would have to split its stock, with the chart showing that a 3-to-1 or 4-to-1 split would probably need to happy in order to provide reasonable weight to the index. But even then, replacing Kraft (which was 2.3 percent of the index) with a split Apple stock that may be 10 to 13 percent would skew the average to the point that the index would probably set an all-time high very soon after Apple joins, if not the first day.
Plus, one should consider – already, there are seven technology-based companies in the Dow average – IBM, Microsoft, Intel, Cisco, HP, AT&T (NYSE:T) and Verizon (NYSE:VZ). While tech is so dominant in the economy, should Apple make it eight and thus have technology make up more than 25 percent of the Dow index? And with a company so large, would th Dow even consider skewing its index by replacing 2 percent of its index with 10 or 13 percent?
As traditional as the Dow seems to be, there is some doubt – at least, not without Apple drastically splitting its stock to where it was a reasonable replacement for Kraft – like, as the chart in the article shows, would probably mean a somewhere between a 10-to-1 to 20-to-1 split. Would Apple seriously consider that much of a split just to be on the same index as rival Microsoft, which didn’t have to split its stock to get there?
The rumors are swirling, but there is a lot of question whether Apple should even join the Dow – would the Dow even extend an invitation – and whether Apple should split its stock into bite-size pieces in order to do it. But would the Dow expect that, or make it a condition in order to join? Based on Apple’s track record, there is some doubt that Apple would want to join a club that wouldn’t have its whole stock as a member.