General Electric Co. (GE), one of the original members of the 30-member Dow Jones Industrial Average, will likely be removed as an index component after more than a century, according to one team of bears on the Street. (See also: The Top 5 Companies Owned by GE.)
"We believe the chances that GE could be removed from the Dow are increasing as GE continues to face substantial challenges including earnings and cash pressure, tough global power generation markets, aggressive downsizing, shrinking its portfolio, management shake-up and SEC investigations," wrote Deutsche Bank's John Inch in a research note Wednesday.
The industrial conglomerate has largely disappointed investors in recent years, most recently slashing its profit outlook and reducing its dividend. In its most recent quarterly earnings report last week, GE fell short of the Street's expectations, yet management remained upbeat on turnaround initiatives including a potential breakup of the firm. The Boston-based company also announced an SEC investigation into its insurance division, which Deutsche Bank indicated "significantly elevates the risks for GE."
A Decline in Absolute Share Price
Trading up about 1.9% on Wednesday morning at $16.25, GE stock reflects a 7% decline in the first month of 2018 and a whopping 45.3% plummet over the most recent 12 months. As the lowest-priced stock in the price-weighted benchmark currently, GE reflects a market capitalization of approximately $140.8 billion. Pharmaceutical giant Pfizer Inc. (PFE) has the second-lowest priced stock of the index, still over double GE's at $37.36 with a market cap at $222.7 billion.
Inch wrote that alongside GE's multitude of issues, the sharp reduction in its absolute share price has caused GE to "increasingly fall into the category of outlier and consequently a likely candidate for removal."
The analyst wrote that the committee reportedly prefers for the Dow to incur no more than a 10:1 ratio between the component companies' highest share price and lowest share price. Yet currently, the ratio between Boeing Co. (BA), which has seen its stock surge near 120% to $357 in the recent 12 months, and beaten down GE, exceeds 21:1. The S&P Dow Jones Indices makes changes to the index without warning and without ceremony. (See also: Why GE's Stock Rebound Will Fizzle.)