Should This Tech Giant Split Its Shares?
The Dow Jones Industrial Average (INDEX: ^DJI) is down a negligible nine points as of 2:15 p.m. EDT. The biggest loser, health insurance giant UnitedHealth Group (NYS: UNH) , dropped 1.4% as industry rivals reported strong results. The company might not be as uniquely unassailable as investors were made to think last week.
But that plunge only took six points off the Dow's value. Tech titan IBM (NYS: IBM) erased all of that with a mere 0.3% hip-swerve. There was no big news, no big market move, yet the stock still sets the Dow's direction just as firmly as the day's biggest loser.
This is possible because the Industrial Average is a price-weighted index. Each one of the 30 member stocks affects the Dow's value in proportion to its share price. Other indexes assign weight based on each stock's market value, while still others base their weighting on fundamental details like book value or sales. But the Dow rests on perhaps the most nebulous of all available choices, which leads to some interesting paradoxes.
IBM's roughly $200 share price makes it about twice as important as oil producer ExxonMobil (NYS: XOM) and nearly three times as heavy as retail titan Wal-Mart (NYS: WMT) -- even though both companies have larger market caps, sale, and profits than Big Blue.
Kind of ridiculous, don't you think?
IBM could correct this imbalance with one swift move: perform a stock split to bring share prices more in line with other Dow members. The average share price on today's Dow is about $57, and the median sits at $53 per share. Take IBM out of the equation, and the averages drop to $52 and $49, respectively. A quick four-for-one share split would put IBM right in the middle of the pack, shifting the burden of being the Dow's biggest market-mover to Chevron (NYS: CVX) , at $111 per share.
Of course, nobody expects IBM to split its stock just to reduce its importance to this crucial index. IBM's last spli(link opens PDF file) was a two-for-one affair in 1999. Share splits largely don't matter, except when your stock risks falling short of the major markets' minimum share prices -- or when you're calculating Dow points. But you should know just how large a shadow IBM casts over the Dow and understand that similar pricing problems are keeping some other very worthy stocks from ever entering the Dow; Apple (NAS: AAPL) and Google (NAS: GOOG) are priced north of $600 per share and would immediately reduce Big Blue to a minor player.
Sometimes it's not enough to be a near-monopolist in several exploding markets or to boast the largest market cap. The Dow still turns you away based on the arbitrary balance between share counts and share prices.
All this talk about esoteric index weights doesn't mean that you should ignore our finest blue-chip index. If you're looking for some long-term investing ideas, let me invite you to read the Fool's brand-new special report: The 3 Dow Stocks Dividend Investors Need. It's absolutely free, so just click here and get your copy today.
The article Should This Tech Giant Split Its Shares? originally appeared on Fool.com.
Fool contributor Anders Bylund owns shares of Google. The Motley Fool owns shares of Apple, Google, International Business Machines, and ExxonMobil. Motley Fool newsletter services recommend Apple, Chevron, Google, International Business Machines, UnitedHealth Group, and Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.