Sears to Get the Boot From the S&P 500

--Sears to be dropped from the S&P 500 at the close of trading Sept. 4

--LyondellBasell Industries to replace Sears on the index

--S&P Dow Jones Indices cites public float threshold for switch

 
   By Chris Dieterich 
 

NEW YORK--Sears Holdings Corp. (SHLD), a founding member of the Standard & Poor's 500-stock index, is getting booted from the venerable benchmark--and its own stock is to blame.

Once America's most iconic retailer, Sears will lose its place in the market measure because its "public float," or the number of shares that are in the hands of public investors, has fallen below a key threshold, according to a release issued by S&P Dow Jones Indices Wednesday.

But the S&P on Thursday added that recent news of a planned rights issue was the tipping point for knocking the retailer out of the benchmark, after more than 50 years as a member. On Tuesday, Sears's board approved a plan that grants shareholders the right to swap stock in Hometown-brand hardware stores it plans to spin off.

"Our sense was that, for holders of index funds and [exchange-traded funds], the rights offering could cause a fair amount of trading expenses. For funds that try to track the index as closely as possible, that echoes through the market," said David Blitzer, chairman of the index committee at S&P Dow Jones. "Here's a stock we were thinking was no longer suitable for the index, so we put the two together." Dow Jones & Co., publisher of this newswire, indirectly owns 2.6% of S&P Dow Jones Indices.

Getting knocked out of the index means mutual funds and ETFs that track the S&P 500--which together account for roughly $1.5 trillion in assets--will have to sell Sears shares, because the company is no longer an index component. The decision was bad news for Sears stock, which tumbled $4.55, or 7.9% to $52.90 Thursday.

Sears's public float has been below the stipulated 50% threshold since October 2008, said Mr. Blitzer. Billionaire hedge-fund investor Edward Lampert and his hedge fund ESL Investments hold 62% of shares, a position that was first accumulated in Kmart Holding prior to a blockbuster merger agreement between the two companies announced in 2004, according to regulatory filings.

A spokesman for ESL Investments didn't immediately return a call seeking comment.

"While we're disappointed in Standard & Poor's decision, we would point out that the action is rules-based and solely a function of the public float of our shares, and not the valuation or performance of the company," a Sears spokeswoman said.

The exit from the S&P 500 is the latest blow for one the most recognizable U.S. retailers, which has been struggling for years to draw traffic through efforts like sprucing up stores and establishing a loyalty program to reward its best customers. During an earnings call earlier this month, Sears said cost-cutting measures helped narrow losses for the fiscal second quarter, but sales still declined more than expected.

Sears is the latest among a string of once-vaunted retailers to lose its place on the S&P 500. Montgomery Ward was dropped in 1968, Gimbel Brothers in 1973 and Woolworth in 1998. Just one retailer that was a member of the original S&P 500, J.C. Penney Co., will remain after the Sears exit.

"For most of my career, it was considered a gilt-edge company--Sears was one of the 800-pound gorillas," said Seaport Securities' Teddy Weisberg, a longtime trader on the floor of the New York Stock Exchange.

The S&P Dow Jones index committee meets regularly to consider additions and removals for the S&P 500. Changes are made as the committee sees fit, the spokesman said.

A majority of the share float being in public hands is among numerous requirements for inclusion in the index. A low public float can contribute to trading volatility, because fewer shares are available to change hands. A market capitalization of at least $1 billion is another requirement.

Once a company becomes a member of the S&P 500, however, meeting all those requirements isn't essential for staying in. To maintain index consistency, only members that "substantially violate" one or more of the criteria get the boot, according to the S&P's rules. For instance, four other companies on the index--Kinder Morgan Inc. (KMI), Titanium Metals Corp. (TIE), AutoNation Inc. (AN) and American International Group Inc. (AIG)--are below the same threshold.

Richard Sears founded R.W. Sears Watch Company in Minneapolis in 1886. A year later, Mr. Sears moved his business to Chicago, where he met Indiana-born Alvah Roebuck. The two went on to found their namesake company providing a mail-order-goods catalog under the name Sears, Roebuck & Co., according to the company's website.

Shares first hit the market in 1906, and were added to the Dow Jones Industrial Average in 1924, a year before Sears opened its first retail store on Chicago's West Side.

The company's market value peaked at $10.1 billion in 1965, when it was the fifth-largest company on the S&P 500, at that time just ahead of General Electric, according to S&P. Sears's market cap at Thursday's close was $5.6 billion. Sears was bumped from the Dow Industrials in 1999.

LyondellBasell Industries (LYB), a Dutch chemical company, will take Sears's spot in the index after the close of trading on Sept. 4, according to S&P Dow Jones Indices. LyondellBasell rose $1.78, or 3.8% to $48.67 on Thursday, benefiting as investors who track S&P 500 members picked up shares.

"We are pleased to be recognized among the leaders of industry in the U.S. economy. Being included in the S&P 500 raises the visibility of our company and the success that we are achieving," a spokesman from LyondellBasell said.

As it happens, Sears has been one of the best performers on the index in 2012. Through Wednesday, Sears's stock has climbed 81%, better than all but five of the index's members. Its performance has been shaky in recent years, though, losing more than 50% in 2011 after losing 12% in 2010.

Write to Chris Dieterich at [e-mail]

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