--UnitedHealth to replace Kraft Foods in the Dow Jones
Industrial Average on Sept. 24
--UnitedHealth will be the fourth health-care name in the
Average, but the first health insurer
--Change comes as Kraft spins off its North American grocery
business
(Updates with background throughout and with comment from
S&P Dow Jones Indices in the eighth paragraph and from Kraft in
the ninth paragraph. )
By Kaitlyn Kiernan
NEW YORK--The Dow Jones Industrial Average will become a little
more health-sector-heavy on Sept. 24, when insurer UnitedHealth
Group Inc. (UNH) will replace Kraft Foods Inc. (KFT) in the
30-component average.
The shift comes as Kraft Foods, the global-snacks company, plans
to spin off its North American grocery business and begin trading
as Mondelez International Inc. The Dow Jones Averages Index
Committee, which determines the blue-chip average's makeup, said
Kraft's reduced size makes it unfit for the blue chips.
The change will make UnitedHealth the second insurer in the
average, joining Travelers Companies Inc. (TRV), which was added to
the Dow during its last shake-up in June 2009. But Travelers
doesn't offer health insurance.
"The shift reflects the growing importance of health-care
expenses," said Peter Jankovskis, co-chief investment officer at
Oakbrook Investments. "The change makes sense in terms of what the
Dow is trying to do as a 30-component representation of the U.S
economy."
S&P Dow Jones Indices said in a release Friday that
UnitedHealth, the biggest managed-care company by revenue and
membership, will diversify the Dow's health-care wing, currently
represented by pharmaceutical companies Johnson & Johnson
(JNJ), Merck & Co. (MRK) and Pfizer Inc. (PFE).
The health-care sector has grown to account for about 7.6% of
gross domestic product last year, up from 6.6% of GDP in 2006,
according to U.S. Bureau of Economic Analysis data. As of the close
of trading Thursday, Johnson & Johnson, Merck and Pfizer made
up 7.9% of the blue-chip index by weight. With the addition of
UnitedHealth, the weight of the health-care sector would increase
to about 10%.
S&P Dow Jones Indices said the Dow Jones Averages Index
Committee believes the reduced market capitalization and projected
lower percentage of revenue makes Kraft less representative of the
U.S. large-cap market space.
"The new company's smaller size and lower stock price means it
will no longer be the most appropriate choice to be a part of the
Dow Jones Industrial Average," said Dave Guarino, director of
communications at S&P Dow Jones Indices, during a conference
call Friday morning.
A Kraft spokeswoman declined to address the exit from the Dow
but said, "As we separate into two industry-leading companies on
Oct. 1, we remain focused on maintaining strong business momentum,
driving solid growth for our shareholders and making foods people
love."
With the Dow's unique makeup--its 30 components are weighted by
stock price, rather than market value--the swap of UnitedHealth for
Kraft makes sense in terms of the similarity in share price,
according to Nicholas Colas, chief market strategist at ConvergEx
Group. "Price has to be a consideration, because that is the
weighting," Mr. Colas said. "It's a logical swap, because it
doesn't create too much of a disturbance in the weightings of the
other components."
S&P Dow Jones Indices' Mr. Guarino confirmed that price was
a consideration during the selection process.
Kraft finished at $40.13 on Thursday, while UnitedHealth closed
at $53.89. On Friday, Kraft shares were down 13 cents, or 0.3%, to
$39.99, while UnitedHealth shares added five cents, or 0.1%, to
$53.94 after the news.
The price consideration is likely the reason many Apple Inc.
(AAPL) fans will continue to be disappointed by the tech giant's
lack of inclusion in the Dow Jones Industrial Average. With a share
price of about $695, were Apple included in the index, it would end
up with more influence than International Business Machines Corp.
(IBM), Caterpillar Inc. (CAT), Exxon Mobil Corp. (XOM), Coca-Cola
Co. (KO), Microsoft Corp. (MSFT), General Electric Co. (GE) and
Bank of America Corp. combined.
"All benchmarks are in some way imperfect," said Lawrence
Creatura, a portfolio manager at Federated Investors. "But as the
Dow tried to keep turnover low and focuses on companies with more
stability and longer-term track records it creates a tool that does
measure the broad economy."
Kraft was a relatively recent addition to the blue-chip index,
having replaced American International Group Inc. (AIG) at the
height of the U.S. financial crisis in September 2008. Cisco
Systems Inc. (CSCO) and Travelers replaced Citigroup Inc. (C) and
General Motors Corp. (GM) on the average during the most recent
switch, in June 2009.
Changes to the Dow Jones Industrial Average are determined by
the Averages Index Committee, which is headed by S&P Dow Jones
Indices' David Blitzer and includes the managing editor of The Wall
Street Journal, Robert Thomson; David Carlson, director at S&P
Dow Jones Indices; and Craig Braswell, senior director. Dow Jones
& Co. publishes this newswire and The Wall Street Journal.
Friday's announced change is the first since Dow Jones and CME
Group formed a joint venture with CME Group in early 2010, and
since partnering with McGraw-Hill's (MHP) S&P Indices this
year. The Averages Committee was created in 2010. With the new
joint venture with S&P, Mr. Thomson and Mr. Braswell were
retained as committee members from Dow Jones Indexes, while Mr.
Blitzer and Mr. Carlson joined from S&P Indices.
--Melodie Warner contributed to this article
Write to Kaitlyn Kiernan at kaitlyn.kiernan@dowjones.com
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