NEW YORK (Reuters Breakingviews) - General Electric’s quarterly earnings, so bad that even new Chief Executive John Flannery called them “horrible,” have put fresh pressure on a stock that’s down more than 25 percent this year. The performance threatens to add insult to injury. The last surviving original member of the Dow Jones Industrial Average risks being excluded from the benchmark.
With roots that go back to Thomas Edison’s electric-light company in the 1870s, GE was one of 12 companies selected by Dow Jones when it created its market indicator in 1896. While some, like the American Cotton Oil Co and the National Lead Co, have long since faded into history, GE became a symbol of American industrial prowess. It began electrifying the railways in the 1890s, built the first U.S. jet engine in 1941 and supplied the silicon for Neil Armstrong’s moon boots. Under Jack Welch, it was an avatar of America’s economic revival in the 1980s and 1990s, and became the world’s most valuable company at the turn of the century.
The conglomerate has underperformed for years, though, despite shedding its appliance and finance divisions and making big bets on power and energy. GE shares have produced a total return of minus 2 percent a year for the past 10 years, according to Eikon data, far behind the Dow’s 8.4 percent annualized gain. The stock accounts for just 0.7 percent of the benchmark, well behind Apple’s 4.6 percent and Boeing’s leading 7.7 percent.
The Dow is an oddity as the only major price-weighted U.S. market tracker, and for years GE has had one of the lower weights. There is no minimum weighting required, and the boffins at S&P Dow Jones Indices may be reluctant to drop the oldest constituent, especially as today’s average contains few actual industrial companies. Yet the stock has already broken an unwritten rule that the ratio of the highest- to the lowest-priced stock should be 10 to 1.
GE still boasted a $206 billion market cap by Friday’s close, the 19th largest among U.S. companies, and exclusion from the Dow wouldn’t necessarily trigger massive selling because most indexed funds track broad indexes like the S&P 500. But it’s telling that telecoms group AT&T has underperformed the Dow by 23 percentage points since it was removed to make way for Apple two years ago. Flannery is already considering slashing the dividend to husband resources. The last thing he needs is the humiliation of being kicked out of the Dow.
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