UnitedHealth to Replace Kraft in DJIA

09/14/2012| 05:09pm US/Eastern

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--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 closing share prices and quote from Timothy Ghriskey in the 16th 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. (>> UnitedHealth Group Inc.) will replace Kraft Foods Inc. (>> Kraft Foods Inc) 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. (>> The Travelers Companies, Inc.), 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 (>> Johnson & Johnson), Merck & Co. (>> Merck & Co., Inc.) and Pfizer Inc. (>> Pfizer Inc.).

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 make 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 20 cents, or 0.5%, to $39.93, while UnitedHealth shares added 36 cents, or 0.7%, to $54.25 after the news.

The price consideration is likely the reason many Apple Inc. (>> Apple Inc.) 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 $691, were Apple included in the index, it would end up with more influence than International Business Machines Corp. (>> International Business Machines Corp.), Caterpillar Inc. (>> Caterpillar Inc.), Exxon Mobil Corp. (>> Exxon Mobil Corporation), Coca-Cola Co. (>> The Coca-Cola Company), Microsoft Corp. (>> Microsoft Corporation), General Electric Co. (>> General Electric Company) 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."

But not all were satisfied with the scope of Friday's announced change, with some looking for bigger moves to incorporate newer technology companies.

"The expectation was for more of a change, but we just got another baby step forward, not the giant leap that many had expected to make the average more relevant," said Timothy Ghriskey, chief investment officer at Solaris Asset Management. "The problem is Dow Jones doesn't want to include an Apple or a Google because of the stock price, but the stock-price weighting makes the index less relevant."

Kraft was a relatively recent addition to the blue-chip index, having replaced American International Group Inc. (>> American International Group, Inc.) at the height of the U.S. financial crisis in September 2008. Cisco Systems Inc. (>> Cisco Systems, Inc.) and Travelers replaced Citigroup Inc. (C) and General Motors Corp. (>> General Motors Company) 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 of the index firm. 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 (>> The McGraw-Hill Companies, Inc.) S&P Indices this year. The index 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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