Along with the rise in its share price, Tesla has demonstrated its ability to perform financially and fundamentally. By constantly becoming profitable, Tesla is likely to join the S&P 500 Index (SNPINDEX: ^ SPX) in the near future. Yet, in making a very unexpected move on Aug. 11, CEO Elon Musk brought out his usual flair for the dramatic – and argued why Tesla should join the Dow Jones Industrial Average (INDICES DJ: ^ DJI).
Overcoming the Last Speed Bump on Tesla’s Path to the Dow
Until Tuesday, there was a seemingly insurmountable hurdle that would have kept Tesla from entering the Dow Jones Industrials. Its stock price of nearly $ 1,400 per share at the close of August 11 would have made it impossible to choose to join the price-weighted average, as its influence on all of Dow Jones’ industrials would have been unfairly high. Even now the fact that Apple has a nearly 11% weighting in the Dow Jones is somewhat controversial, and that’s with Apple’s share price of just $ 450. The idea that Tesla represents 30% was a complete non-starter.
Still, Musk surprised just about everyone by doing something Tesla had never done before: divide his shares. He announced a 5-to-1 split for owners of record on August 21, with the shares scheduled to start trading on a split-adjusted basis a week and a half later on August 31.
To be clear, Tesla’s board hasn’t explicitly said it’s trying to join the Dow. In its press release, the company mentioned the desire to “make shareholding more accessible to employees and investors”. Yet with the advent of fractional stock trading, this is an increasingly difficult argument to make. And there is no doubt that becoming one of the Dow 30 stocks would be a big boost for Musk.
One could also see the choice of a 5-to-1 division as a testament to Musk’s vanity. Considering the stock price hike Wednesday morning to nearly $ 1,500 a share, the 5-to-1 ratio would put Tesla’s shares around $ 300 after the split. This would make Tesla the third most influential stock in the Dow behind Apple and Groupe UnitedHealth and give the electric car maker a weighting of around 7% on the average.
Why Tesla in the Dow Jones isn’t a crazy proposition
Once its price problem is resolved, the case for Tesla to join the Dow is compelling:
- The Dow has been automaker-free for over a decade after going through most of its history with at least one.
- Tesla’s market capitalization of over $ 250 billion puts it in the top third of current Dow components.
- Its exposure to solar energy would also increase the Dow’s reach, complementing the two big oil companies currently in its ranks. Its other adjacent industrial applications would also strengthen the industrial origins of the average.
The best argument against Tesla joining the Dow is that it is a relatively new company. Most of the current Dow members have long pedigrees stretching back decades. Still, the move would not be unprecedented. Microsoft had only been listed for 13 years before joining the average, and Visa entered the Dow in 2013, just five years after its IPO in 2008.
It’s the Dow Jones movement
Apart from that, the great uncertainty about Tesla’s arrival at the Dow Jones comes in large part from the fact that there are no obvious candidates to kick out to make way for the automaker. Although some companies have low stock prices that give them insignificant influence over the global Dow Jones, their fundamental businesses are still strong.
Nonetheless, the ball is now in the court of Dow manager S&P Dow Jones Indices to decide how to proceed. Should there be a vacancy in the Dow Jones Industrials, investors should expect Tesla to take a close look, thanks to Elon Musk’s decision to split the stock.