There has been considerable speculation that Nvidia could replace Intel in the Dow Industrial Average. Decisions on additions and deletions to the Dow is made by the S & P Dow Jones Indices Index Committee. There are no specific rules for inclusion or exclusion. But the committee has said that “a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors.” Nvidia would clearly meet those criteria. It might be better to look at this the other way around: are there any companies that might be candidates for deletion from the Dow? Companies can be deleted for several factors, including a merger/acquisition, or if the company experiences financial distress. The S & P Dow Jones committee also wants to maintain adequate sector representation and it may come to believe there are other companies that better represent that corner of the market. Finally there is the stock price issue. Unlike the S & P 500, the Dow is price weighted. A stock with a price way below everyone else would essentially become irrelevant in the index, and that is undesirable. UnitedHealth Group is currently the highest priced stock in the Dow, at $516. Intel is currently the lowest price stock in the Dow at $30. That is an unusually wide spread. The average price of the 30 stocks in the Dow is $202. The Committee has said that it monitors whether the highest-priced stock in the index has a price more than 10 times that of the lowest. UnitedHealth’s price is 17 times more than Intel, but Cisco and Verizon Communications are also more than 10 times smaller than UnitedHealth. Bottom line: Nvidia’s 10-for-1 stock split makes it a Dow contender, but the Committee has a clear preference for stocks that are well-seasoned, and not just sudden superstars. Let’s call Nvidia a contender but not a shoo-in.
