It's time for Boeing to be removed from the Dow Jones Industrial Average.
Is it reasonable to ponder if the aircraft manufacturer remains appropriate for the blue-chip index? And the response to this query is unequivocally: no.
As Ron Epstein, an aerospace analyst for Bank of America, puts it, "If you're looking for bellwether, strong balance sheet companies, they don't tick those boxes anymore." In the opinion of Epstein, Boeing does not necessitate a spot in the index.
The term "industrial" that comprises the Dow's full title is somewhat outdated, a remnant from the Dow's creation at the end of the 19th century during the industrial revolution. The United States has moved beyond being primarily an industrial economy, with companies like Disney replacing iconic US Steel in 1991, symbolizing the shift to information and services.
The Dow has lost representatives from key manufacturing sectors such as autos, steel, and primary metals over time and has been replaced by financial institutions, tech companies, and pharmaceuticals. If an aircraft manufacturer were the only one left in the Dow, such a development wouldn't be all that unexpected.
A multitude of challenges
Boeing faces numerous hurdles that make its continued presence in the index puzzling.
The company has not reported an annual profit since 2018 and only a few narrowly profitable quarters since then, accumulating core operating losses of $33.3 billion with further losses likely on the horizon.
The blow-off of a door plug from an Alaska Airlines jet in January sparked numerous federal investigations, as over a dozen whistleblowers warned about a company culture that prioritized profitability over the quality and safety of their planes, resulting in production of the best-selling 737 Max being limited to just 32 deliveries a month - levels unlikely to return the company to profitability.
Beyond that, there are two significant issues indicating that Boeing no longer has a place in the Dow. Its credit rating has dropped to the lowest level in the "investment grade" debt category, and there are indications that it will soon fall into junk bond status, a sign of an elevated risk of default. No other Dow component bears such a precarious credit outlook. In addition, Boeing agreed in July to plead guilty to charges of deceiving the Federal Aviation Administration while seeking initial approval for the 737 Max to carry passengers, a deception that led to a design flaw tied to two fatal crashes. The company soon will be under the supervision of a court-appointed monitor.
These problems have led to a 60% plummet in Boeing shares since the second fatal crash of the Max in 2019 and a 35% decline since the Alaska Airlines incident. If Boeing shares hadn't decreased at all since the incident, the Dow would have been more than 1,600 points, or about 4%, higher than its current 40,737 closing level on Tuesday.
"If it's not an albatross, it's at least an anchor," said Sam Stovall, chief investment strategist for CFRA Research.
Striving to remain relevant
Boeing wasn't an early component of the Dow - the index was established seven years before the first plane took flight at Kitty Hawk, and 20 years before Boeing was incorporated. Boeing has been in the index for 37 years, joining in 1987.
Longevity in the index hasn't ensured a company's place there; General Electric, one of the original components and a staple of the Dow since 1908, was removed in 2018 following years of difficulties.
"The Dow tries to remain as relevant as possible," Stovall explained.
Stovall pointed out that there are other profitable aerospace companies with larger market caps, such as Lockheed and GE Aerospace successor company GE Aerospace, that would be preferable choices. In addition, Stovall noted that those in charge of selecting the Dow components have shown a preference for companies with a tech focus. In 2020, the Dow dropped ExxonMobil, which was struggling with low oil prices during the pandemic, and added tech company Salesforce, which was experiencing success at that time.
"Boeing won't disappear as a company," Stovall said. "But I wouldn't be surprised if I woke up tomorrow to find out that the Dow has dropped Boeing and added Tesla."
ExxonMobil has flourished outside the Dow, reporting record earnings in January 2023 as oil prices skyrocketed following the start of the war in Ukraine. Boeing, despite its challenges, has the advantage of being part of a duopoly in the manufacture of full-size commercial jets, and its competitor, Europe's Airbus, is not qualified to join the all-American Dow.
Boeing declined to comment when asked about its membership in the Dow. However, the company still plays a crucial role in the US economy as the largest exporter, boasting nearly 150,000 US employees, and an economic impact of $79 billion, supporting 1.6 million direct and indirect jobs at more than 9,900 suppliers located in all 50 states. The company is also essential to the operations of the nation's airline industry, which is vital to the US economy.
However, this is not a question about Boeing's survival, which is likely. Instead, the issue at hand is whether it will continue to be one of the 30 companies that make up one of America's most closely watched stock indexes, an index viewed as an indicator of the overall economy by many people.
Given Boeing's financial struggles and significant issues, such as a drop in its credit rating and a guilty plea for deceiving the Federal Aviation Administration, it's questionable whether the company should continue to be an investment consideration in the business sector, let alone a component of the prestigious Dow Jones Industrial Average.
Despite Boeing's significant role as the largest exporter in the United States and a crucial contributor to the nation's airline industry, its continued presence in the Dow Jones Industrial Average seems less viable, given the evident challenges it faces and the potential for more profitable and relevant alternatives to be considered.
