With Nvidia Kicking Intel Out of the Dow Jones, Will Meta Platforms or Alphabet Eventually Replace Walt Disney Stock?

The Dow Jones Industrial Average (^DJI -0.00%) is undergoing its third major shakeup in the last five years. In 2020, Honeywell International, Salesforce, and Amgen replaced RTX (formerly Raytheon Technologies), ExxonMobil, and Pfizer. Earlier this year, Amazon replaced Walgreens Boots Alliance. And on Friday, Nov. 8, Nvidia will replace Intel and Sherwin-Williams will take the slot occupied by chemical giant Dow.

There have been plenty of changes happening to the DJIA in a relatively short amount of time, suggesting that additional changes aren't out of the question. That potential has some wondering which component could be swapped out next. Could Walt Disney (DIS 0.04%), for example, be the next company to get dropped? And if it does fall off, could Meta Platforms (META 3.44%) or Alphabet (GOOGL 2.40%) (GOOG 2.21%) be candidates to replace the media giant?

Dow Jones Industrial Average dynamics

The Dow's 30 components represent the 11 stock market sectors. Over time, sector weights have changed as tech has become a larger share of the U.S. stock market's total value. As such, the Dow is far less industrial than it used to be.

Changes to the Dow's composition can occur for various reasons. Generally, this usually occurs because a company has lost some of its industry leadership and/or has underperformed the Dow index so much that it is no longer large enough to properly represent its sector.

The Dow is a price-weighted index, meaning a stock's price rather than its market cap determines its weighting. Five years ago, UnitedHealth Group had a stock price of around $250 per share, Goldman Sachs was around $220, and Microsoft was around $145. Big gains in all three companies (and a lack of stock splits) have allowed them to become today's top three highest-weighted components -- combining for over 23% of the index.

The median price of a Dow component is around $200, whereas the highest is UnitedHealth at $567 (at the time of this writing), and Intel is (for the moment) the lowest at just $23.30 per share. Prolonged underperformance is a common theme for certain companies getting removed from the Dow.

When RTX, Pfizer, and ExxonMobil were removed on Aug. 31, 2020, they had all suffered terrible five-year performances, with ExxonMobil losing 46.9% of its value, RTX up just 6.2%, and Pfizer up just 17.3%. Moreover, all three companies had stock prices of $61 or lower -- significantly below average. Walgreens had fallen to a 25-year low and a single-digit stock price, making it ripe for replacement by Amazon.

Disney is off just 22% or so from its 10-year low (reached on Oct. 4, 2023). Years of underperformance have pushed its ranking in the Dow down to the 23rd spot. Normally, these conditions could make Disney vulnerable to replacement, but Disney is turning the corner. Its streaming segment is now profitable after years of sizable losses. Disney has had better recent success at the box office, with hits like Inside Out 2 improving its revenue situation, and Disney's parks continue to do well and generate plenty of cash flow for the company.

Overall, Disney represents a unique blend of traditional media, streaming, merchandise, entertainment, cruise ships, and more. Now, if Disney's streaming segment falls back into the red and the parks show signs of weakness, Disney may warrant replacement. But for now, Disney deserves to stay.

Predicating the Dow's next changes

Alphabet and/or Meta Platforms are long overdue for inclusion in the Dow. The communications sector has grown to become 9.1% of the S&P 500 -- the fourth-largest sector by weight. Alphabet and Meta are key parts of that surge because they are in the communications sector, not tech.

Currently, the only communications components in the Dow are Disney and Verizon Communications (VZ -1.43%), which comprise a combined 2% or so of the index. As of right now, communications is heavily underrepresented and outdated, given there is no social media exposure.

Alphabet and Meta Platforms are similar companies but have some key differences. Meta has its flagship apps, Instagram, Facebook, and What's App, but it also has its Reality Labs research and development division, which invests heavily in the metaverse, virtual reality, artificial intelligence, and more.

Alphabet has Google, YouTube, Google Cloud, Android, and more, so it's less of a play on social media. Adding Alphabet would complete the trio of the three largest cloud companies (along with Amazon Web Services [AWS] and Microsoft Cloud). It would also add a dominant media platform, YouTube, which would pair well with Disney. And Android would add smartphone exposure to go along with Apple's iPhone.

Alphabet has already completed the crucial step of splitting its stock in 2022. At around $170 per share, Alphabet is tailor-made for inclusion in the Dow since it is right around the median level. If Meta did a 4-for-1 stock split, it would have a price per share of $143, which is around Nvidia's stock price. That could be a good fit, too. Still, given Alphabet's history and greater diversification, it will probably be added to the Dow before Meta.

In terms of replacement candidates, Verizon and Cisco Systems (CSCO 0.36%) stand out as better choices than Disney. For starters, both companies have stock prices below $60 -- so they are already low weights. Both stocks have performed terribly over the last five years, with Cisco up just 18% compared to a 31% decline for Verizon.

Verizon is currently the highest-yielding stock in the index, with a 6.6% dividend yield. But since the powers that be replaced Dow, which yields 5.8%, with Sherwin-Williams, which yields just 0.8%, it seems that dividend yield is now less important a consideration than future growth potential.

Replacing Cisco with Alphabet or Meta would technically be a cross-sector adjustment since Cisco is in the tech sector. But the index has made similar changes before, with Salesforce replacing ExxonMobil.

Moreover, there are currently six tech stocks in the Dow -- Microsoft, Apple, Nvidia, Salesforce, International Business Machines, and Cisco. But Amazon is very tech-focused with AWS and so are Alphabet and Meta. This means that replacing what is arguably the weakest tech stock in the Dow with a tech-focused communications company makes a ton of sense.

A growth-powered stock market

The Dow's changing composition in recent years shows a noticeable shift from value toward growth and less emphasis on yield. Cisco currently has a sizable yield of 2.9% and a dirt-cheap price-to-earnings ratio of 22.1. But it is far from one of the highest-valued tech-oriented companies. Verizon is a leader in the telecom space, but social media is much more critical to the stock market's value than telecom.

The inclusion of Salesforce, Amazon, and Nvidia in less than five years shows the Dow's willingness to adapt to changing market dynamics. The moves follow trends we are seeing in the S&P 500, where the index yield has dropped to just 1.3%, while it used to be around 2%.

If the broader stock market becomes less about passive income, risk-averse investors may increasingly turn to higher-yielding sectors, like energy or utilities, or toward other asset classes, like bonds and high-yield savings accounts. A more growth-focused Dow also means a loftier valuation based on future growth rather than past results, which could lead to higher volatility and more dramatic swings to the upside and the downside.