By: Scott Murphy

Amazon.com (AMZN), a broadly owned stock in our core portfolios, was recently anointed as the newest member of the Dow Jones Industrial Average (DJIA). As one of the largest publicly traded companies, one could argue this was long overdue. The S&P Dow Jones indices, which manages this thirty-stock benchmark, said the changes were prompted by Walmart’s (WMT) 3-for-1 stock split, which became effective on February 26, 2024. Amazon replaced Walgreens Boot Alliance (WBA) as one of the thirty stocks in the index.

The evolving nature of the U.S. economy and the weighting of the Dow Jones Index explain this change. Unlike the S&P 500 and the Nasdaq Composite, the blue-chip index is weighted by share price, not by market capitalization. Walmart’s 3-for-1 split reduced its effect on the index due to its stock price falling from $180 to $60, and thus decreased its overall weighting in the index. The Dow is calculated by adding the prices of the thirty stocks and dividing them by a factor that accounts for changes such as stock splits and index entrants. This means that a company with a higher share price has a greater effect on the index moves, regardless of its total market value. Given Amazon’s current share price of $180, its influence on the index will be much higher than Walgreens’ $20 share price.

In addition to keeping the consumer sectors’ representation in the DJIA at an appropriate level, the Committee also looks for companies with an excellent reputation, sustained growth and a high level of interest from investors. Inferred but not stated is the simple fact that the Dow has lagged behind the S&P 500 and Nasdaq in recent years because it is less oriented toward technology stocks. The blue-chip index has climbed about 50% over the past five years, while the S&P 500 has surged more than 75%, and the tech-heavy Nasdaq has more than doubled. The underlying beauty of the addition of Amazon is that the index gets greater representation in the consumer sector because Amazon is one of the world’s largest retailers. The DJIA also gets a nod in the technology space due to Amazon’s role in cloud computing through its AWS segment, which is an industry leader in helping companies manage and store their data through its industry-leading web hosting business.

Whether this inclusion going forward in the Dow Jones index will improve Amazon’s stock price is open for debate, and only time will tell. It does, however, give Amazon additional support as a member of the three preeminent indices—the Dow, Nasdaq and the S&P 500—that investors use daily to access the overall health of the market. Amazon will be one of only a handful of stocks in all three, and if it continues to outflank its competitors in both the retail and cloud space, which we believe they will, the addition will turn out to be a solid choice going forward, and a must-have holding in a diversified portfolio.