Being part of the S&P 500 is a significant milestone for a company, reflecting its market leadership and investor confidence. However, it’s not uncommon for companies to be delisted from this prestigious index, with the average lifespan of a company on the S&P 500 around 21 years. Delisting can happen for a variety of reasons and often has immediate, sometimes negative, implications for the company and its investors.
Understanding why companies are removed and the impact of this event can help investors and stakeholders make informed decisions. Here’s a look at why companies might be removed from the S&P 500, what it means for the company’s stock, and how recent examples highlight the effects.
Key Takeaways
- Increased Visibility and Investor Demand: Inclusion in the S&P 500 enhances a company’s visibility, often leading to increased investor interest and, potentially, a rise in stock price.
- Immediate Price Drop After Removal: When a company is dropped, its stock can experience an immediate price drop due to decreased demand and reduced visibility.
- Types of Delisting: Companies may be removed voluntarily (through mergers or going private) or involuntarily (if they no longer meet criteria like market cap or profitability).
- Investor Response: Investors need to assess whether to hold or sell based on the company’s future prospects, rather than solely on its S&P 500 status.
Understanding the S&P 500
The S&P 500, short for Standard & Poor’s 500, is one of the most widely followed stock market indexes globally, representing the performance of 500 large U.S. companies. Alongside the Dow Jones Industrial Average (DJIA) and the Nasdaq Composite, it serves as a core benchmark of the U.S. market’s overall health.
As of Q4 2024, the S&P 500 includes prominent companies by market cap, like:
- Apple Inc. (AAPL), Microsoft (MSFT), NVIDIA (NVDA), Alphabet (GOOGL/GOOG), and Amazon (AMZN).
Criteria for Inclusion in the S&P 500
Inclusion isn’t guaranteed solely by company size. Key criteria include:
- Market Capitalization: Companies need an unadjusted market cap of at least $18 billion.
- Public Float: At least 10% of shares must be available to the public.
- Financial Health: The company should have positive earnings over the most recent four quarters.
- Liquidity: Sufficient trading volume and a reasonable share price are necessary.
- U.S. Domicile and Public History: Companies must be based in the U.S. and have been publicly listed for at least 12 months.
The S&P 500 Index Committee, which meets quarterly, decides which companies to add or drop, ensuring the index reflects the large-cap U.S. equity market.
Reasons Companies Are Removed from the S&P 500
Removal from the S&P 500 can be voluntary or involuntary:
- Voluntary Delisting:
- Going Private: Companies may go private to reduce costs, avoid public scrutiny, or simplify operations.
- Mergers and Acquisitions: When a company merges or is acquired, it may no longer exist as an independent entity.
- Cost Reduction: Maintaining public listing requirements can be expensive, and some companies opt to delist to cut costs.
- Involuntary Delisting:
- Declining Market Cap: If a company’s market cap falls below the threshold, it may be removed.
- Liquidity Issues: Low trading volume or insufficient public float can prompt removal.
- Poor Financial Performance: Extended losses or a potential bankruptcy signal financial instability.
- Regulatory Noncompliance: Not meeting U.S. SEC or exchange requirements can lead to removal.
Impact on the Stock After Removal from the S&P 500
Short-Term Effects:
- Price Drop: An immediate decline is common as index funds tracking the S&P 500 sell shares.
- Reduced Liquidity: Trading volume often decreases, limiting liquidity and visibility.
- Negative Sentiment: Delisting can signal weaker financial health, impacting investor confidence.
Long-Term Effects:
- Reduced Institutional Ownership: Many funds are mandated to hold S&P 500 stocks, so removal can lead to selling.
- Less Analyst Coverage: Without index status, the company may receive less attention from analysts.
- Possible Restructuring Opportunity: Some companies view delisting as a chance to streamline and refocus, potentially returning stronger.
Examples of Companies Removed in 2024
- Whirlpool Corporation
- Reasons: Decrease in market cap, lower stock performance.
- Effects: Moved to the S&P MidCap 400, stock declined to a 52-week low.
- American Airlines (AAL)
- Reasons: Financial strain from industry-wide travel disruptions, high debt.
- Effects: Loss of investor confidence and reduced financing flexibility.
- Etsy Inc. (ETSY)
- Reasons: Slowing growth post-pandemic, increased competition.
- Effects: Reduced institutional visibility and need to refocus on core strengths.
Other companies removed in 2024 include Zion Bancorp (ZION), Comerica Inc. (CMA), and Illumina Inc. (ILMN).
What Happens When a Stock is Added to the S&P 500?
In contrast, being added to the S&P 500 is often a positive development for a company. Benefits include:
- Increased Visibility and Investor Confidence: Greater media attention and knowledge among investors.
- Stock Price Boost: Typically, prices rise as index funds buy shares.
- Wider Institutional Ownership: New investors enter, expanding the shareholder base.
- Enhanced Liquidity and Perceived Stability: Higher trading volumes and positive sentiment as a company joins a respected benchmark.
In 2024, companies added to the S&P 500 included Palantir Technologies Inc. (PLTR), Dell Technologies Inc. (DELL), and CrowdStrike Holdings Inc. (CRWD).
Removal from the S&P 500 can have immediate and negative impacts on a stock’s price and visibility. Whether a company is removed voluntarily or involuntarily, the delisting does not necessarily signal impending failure. Some companies leverage the delisting as an opportunity to reassess and return to profitability. For investors, such events are a cue to review the stock’s fundamentals and long-term potential.
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