Intel Was Just Dropped From the Dow. History Says This Is What Will Happens Next.

Intel (INTC -2.93%) stock popped Friday after it reported ugly third-quarter results but its outlook for the fourth quarter was better than expected. However, the celebration was short-lived, as S&P Global announced after hours that rival Nvidia would replace Intel in the Dow Jones Industrial Average (^DJI -0.61%).

S&P Global said that the move would give a more representative exposure to the semiconductor industry as the Dow Jones is a price-weighted index and Nvidia's share price is much higher than Intel's. In fact, Intel had the lowest share price of any of the 30 Dow stocks, meaning it had the least influence on the index. The move will go into effect on Friday, Nov. 8, when the index will also swap out chemical company Dow for Sherwin-Williams for similar reasons.

Intel has been a Dow component since 1999, so the move will bring its 25-year run to an end.

Shares of the chip stock sold off on the news, falling 1.8% in the after-hours session. The demotion from the Dow doesn't have the same impact that removal from the S&P 500 would, as only a few ETFs track the Dow. However, it's another inauspicious sign for Intel as it attempts what's arguably the biggest turnaround effort in its history.

The DJIA is updated on an as-needed basis, and its managers aim to have a balanced selection of stocks across all sectors, based on company reputation, a history of sustained growth, and interest to investors. The Dow doesn't switch components often as S&P Global aims for stability. However, as Intel gets set to be dropped, it's worth looking at how past components have fared after being removed from the Dow.

The track record of Dow outcasts

Prior to this announcement, the last time the Dow Jones Industrial Average reshuffled was when Amazon replaced Walgreens Boots Alliance in February. That move came as Walgreens was badly faltering, and the index sought to increase its exposure to the consumer retail sector.

WBA data by YCharts.

Since then, Walgreens has continued to struggle. As you can see from the chart above, the stock has fallen 55% since then, while the S&P 500 is up 13%. Based on those results, it looks like the index manager made the right call by dropping Walgreens.

The last changes in the Dow before that came in 2020, when ExxonMobil, Pfizer, and RTX (formerly Raytheon) were removed from the index in favor of Salesforce, Amgen, and Honeywell. The chart below shows how they've performed since they were removed from the Dow.

^SPX data by YCharts.

As you can see, that batch of former Dow stocks has outperformed the broad-market index, though Exxon shares have soared, as oil stocks were down sharply as oil prices crashed during the pandemic. Before that, the last company to be removed from the Dow was General Electric, which was replaced by Walgreens in 2018. GE split into three companies, GE Healthcare, GE Aviation, and GE Vernova earlier this year, but the stock, driven by CEO Larry Culp's turnaround efforts, has been a winner since then.

Finally, AT&T was the last stock in the last decade to be removed from the Dow as it was ousted in 2015. It has underperformed badly since then with a share price down 12% as the telecom market has been sluggish and it's lost market share to T-Mobile.

^SPX data by YCharts.

One 2017 study showed that stocks removed from the Dow initially experience decreased returns, but over the long run, they outperform stocks that have been added to the index. However, that finding might not be as reliable.

What it means for Intel

Over the last decade, results of stocks that have left the Dow have been mixed. Walgreens, Pfizer, and AT&T have all underperformed the market, while Exxon, RTX, and GE have beaten it.

The study showing long-term outperformance for ex-Dow components should also be encouraging for Intel investors. Ultimately, the sample size of recent stocks is too small and varied to draw a clear conclusion. Intel's future depends much more on its ability to execute its turnaround in the coming quarters than it does on its removal from the Dow.

Intel investors should pay attention to the company's cost-cutting initiatives, upcoming 18A foundry process, and its artificial intelligence (AI) chips that are designed to keep up with Nvidia. If the company can make a comeback, it will likely start with those key initiatives.