Walgreens Boots Alliance (NASDAQ:WBA) witnessed a 3% drop in its stock price on Wednesday following its removal from the Dow Jones Industrial Average, making way for Amazon (NASDAQ:AMZN). This transition concludes a brief tenure for the pharmacy chain operator, the poorest performer on the blue-chip index in 2023.
The decision to replace Walgreens came shortly after the company slashed its dividend payout by nearly half to conserve cash while aiming to regain market share from competitors and diversify beyond its traditional pharmacy business.
Rick Meckler, a partner at Cherry Lane Investments in New Jersey, noted that such changes in the Dow index are not unprecedented. He highlighted that the index often shifts towards companies with stronger growth prospects, as with Amazon. Meckler also emphasized that Amazon’s inclusion introduces higher expected returns and increased volatility due to its stock’s tendency for significant price fluctuations compared to Walgreens.
The catalyst for this swap was Walmart’s (NYSE:WMT) decision to split its shares, which would diminish the retailer’s weighting on the index. It’s worth noting that the Dow’s composition is determined based on the share prices of its components rather than their overall market capitalization.
Walgreens joined the Dow in 2018, replacing General Electric (NYSE:GE). However, since then, the company’s stock has plummeted by approximately 65% in value. In response to its challenges, Walgreens has made strategic changes such as appointing new executives, closing unprofitable stores, and announcing the dividend reduction in January, all amidst subdued consumer spending, declining COVID-19 product sales, and a slow uptake of its healthcare segment.
Currently, Walgreens’ shares trade at a forward price-to-earnings ratio of 6.54, compared to 9 for its larger competitor CVS Health (NYSE:CVS). Pre-market trading saw Walgreens’ shares dip 2.9% to $21.71.
S&P Dow Jones Indices stated on Tuesday that the inclusion of Amazon would enhance consumer retail exposure in the index, reflecting the evolving landscape of the American economy. The change is set to take effect next week, while Amazon’s shares saw a marginal increase to $168.14 before market opening.
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