For most companies, gaining membership among the 30 stocks of the Dow Jones Industrial Average (INDEXDJX:.DJI) marks the pinnacle of their histories of achievement. Given how much a mark of distinction it is for companies to make it into the Dow, you’d think that getting kicked out of the Dow would be the kiss of death for a company.
Certainly, some companies that the Dow Jones Industrial Average (INDEXDJX:.DJI) evicts from its ranks end up failing, with the most notable recent example being the pre-bankruptcy version of General Motors Company (NYSE:GM) in 2009. Yet surprisingly, many former Dow Jones Industrial Average (INDEXDJX:.DJI) components are still in existence in their original form, and a few have even managed to put in relatively strong performances after leaving the average. Let’s take a closer look at the two companies that have most recently left the Dow.
When the former Kraft split itself into two parts, with its North American grocery business keeping the Kraft name and its global snacks businesses taking on the new Mondelez moniker, the Dow decided that neither company was worthy of retaining its spot. Since last September, when the Dow replaced Kraft, Kraft Foods Group Inc (NASDAQ:KRFT) has seen its stock rise 20%. That compares quite favorably to the Dow Jones Industrial Average (INDEXDJX:.DJI)’s roughly 13% rise since then, especially given expectations that Kraft would be the less exciting of the two businesses. In its most recent quarterly results, Kraft Foods Group Inc (NASDAQ:KRFT) notched an impressive earnings beat as the company found surprising growth in areas like Velveeta cheese, Kool-Aid, and Miracle Whip.
Mondelez International Inc (NASDAQ:MDLZ)’s 11% gain has been less impressive. Lower coffee prices and falling candy sales have hurt the company’s revenue, but with powerful brands like Oreo and Cadbury, Mondelez has the stable of products to produce powerful long-term growth. With its growing emphasis on emerging markets that haven’t had exposure to its products before, Mondelez International Inc (NASDAQ:MDLZ) hopes to encourage a whole new group of consumers to bolster the company’s growth.
Since Citigroup was taken out of the Dow Jones Industrial Average (INDEXDJX:.DJI), it too has put up an impressive performance, rising nearly 50%. The problem, though, is that Citigroup Inc (NYSE:C)’s exit came four years ago, and the Dow has soared almost 90% in that time.
Nevertheless, Citi has made great strides since then. It has outperformed rival Bank of America Corp (NYSE:BAC), which stayed within the Dow, by a substantial margin, and it has even kept up with healthier banking peers that didn’t suffer to nearly the same extent as Citi did during the financial crisis.
During the most recent round of stress tests, Citigroup Inc (NYSE:C) passed with flying colors, greatly improving on its capital ratios since last year’s tests. It even managed to best Bank of America Corp (NYSE:BAC) in terms of potential impact on net income in the Federal Reserve’s economic Armageddon scenario. As a sign of its long-term commitment to keeping itself in a healthy capital position, Citi even chose not to seek a dividend increase this year, instead choosing to stay on its recovery path. That dedication to long-term performance bodes well for the bank going forward, and even given Bank of America’s equally impressive financial recovery, it should make you question whether the Dow made the wisest choice in allowing Bank of America Corp (NYSE:BAC) to stay, rather than Citi.
Don’t forget
When a company leaves the Dow Jones Industrial Average (INDEXDJX:.DJI), the first question you should ask is why. In some cases, as with Kraft, the reasoning really doesn’t have much to do with the stock’s future potential. In others, like General Motors Company (NYSE:GM), the damage has already been done and the lack of future prospects for investors is obvious. But if you simply follow the Dow’s decisions and dump a stock from your portfolio when it leaves the index, you could end up missing out on a big profit opportunity.
The article How the Dow’s Recent Rejects Have Fared originally appeared on Fool.com is written by Dan Caplinger.
Fool contributor Dan Caplinger owns warrants on Bank of America. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends General Motors. The Motley Fool owns shares of Bank of America and Citigroup.
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