The electric vehicle pioneer set the terms for inclusion in the most popular stock benchmark in the world.

Like it or hate it, Tesla (NASDAQ:TSLA) has indisputably been one of the biggest success stories of the past decade. Since going public in 2010, Tesla’s stock has soared, and the electric vehicle manufacturer has defied industry naysayers by ramping up production and becoming the most valuable automaker on earth.

Along with its stock price rise, Tesla has demonstrated its ability to perform financially and fundamentally. By becoming consistently profitable, Tesla is likely to join the S&P 500 Index (SNPINDEX:^SPX) in the near future. Yet by making a highly unexpected move on Aug. 11, CEO Elon Musk brought out his usual flair for the dramatic — and made his case for why Tesla should join the Dow Jones Industrial Average (DJINDICES:^DJI).

Getting over the last speed bump in Tesla’s path to the Dow

Until Tuesday, there was one seemingly insurmountable obstacle that would have made Tesla getting into the Dow Jones Industrials impossible. Its stock price of nearly $1,400 per share as of the Aug. 11 close would’ve made it an impractical choice to join the price-weighted average, because its influence over the entire Dow Jones Industrials would’ve been unjustifiably high. Even now, the fact that Apple has a nearly 11% weighting in the Dow is somewhat controversial, and that’s with Apple’s share price of just $450. The idea of having Tesla represent 30% was a complete nonstarter.

IMAGE SOURCE: GETTY IMAGES.

Yet Musk surprised just about everyone by doing something that Tesla has never done before: splitting its stock. It announced a 5-for-1 split for owners of record on Aug. 21, with shares to start trading on a split-adjusted basis a week and a half later on Aug. 31.

To be clear, Tesla’s board of directors didn’t explicitly say it’s trying to join the Dow. In its press release, the company cited the desire to “make stock ownership more accessible to employees and investors.” Yet with the advent of fractional share trading, that’s an increasingly difficult argument to make. And there’s no doubt that becoming one of the Dow 30 stocks would be a big ego boost for Musk.

One might also see the choice of a 5-for-1 split as a testament to Musk’s vanity. Given the boost to the stock price Wednesday morning to nearly $1,500 per share, the 5-for-1 ratio would put Tesla shares around $300 after the split takes effect. That would make Tesla the third-most influential stock in the Dow behind only Apple and UnitedHealth Group and give the electric car maker about a 7% weighting in the average.

Why Tesla in the Dow isn’t a crazy proposition

With its share-price problem solved, the case for Tesla joining the Dow is compelling:

  • The Dow has been without a car company for more than a decade after going through most of its history with at least one.
  • Tesla’s market capitalization of more than $250 billion puts it in the upper third of current Dow components.
  • Its exposure to solar energy would also add to the Dow’s breadth, complementing the two large oil companies currently among its ranks. Its other adjacent industrial applications would similarly boost the average’s industrial origins.

The best argument against Tesla joining the Dow is that it’s a relatively new company. Most of the current members of the Dow have long pedigrees dating back for decades. Yet the move wouldn’t be unprecedented. Microsoft had only been publicly traded for 13 years before it joined the average, and Visa got into the Dow in 2013, just five years after its 2008 IPO.

It’s Dow Jones’ move

Other than that, the big uncertainty about Tesla joining the Dow comes largely from the fact that there aren’t any obvious candidates to get kicked out to make way for the automaker. Although some companies have low share prices that give them insignificant influence over the overall Dow, their fundamental businesses are still solid.

Nevertheless, the ball is now in the court of Dow manager S&P Dow Jones Indices to decide what to do next. If a vacancy comes up in the Dow Jones Industrials, investors should expect Tesla to get a close look, thanks to Elon Musk’s decision to split the stock.

Author: Dan Caplinger

Source: Fool: Elon Musk Splits Stock, Makes Tesla’s Case to Join Dow Jones

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