UnitedHealth Group will replace Kraft Foods Inc in the Dow Jones industrial average, S&P Dow Jones Indices said on Friday. The change, effective at the market close September 21, follows Kraft's plan to split itself into a snack company called Mondelez International and a North American grocery business with the Kraft name.
The index change "was driven by Kraft's decision to split, this isn't an investment opinion or recommendation," David Blitzer, chairman of the index committee at S&P Dow Jones Indices in New York, said on a conference call.
Noting that Mondelez will be significantly smaller than Kraft and that the majority of Mondelez's revenue will come from outside the United States, Blitzer said that "if a stock is clearly not eligible to be added, we'll consider removing it, especially if we see a better or more interesting stock that's eligible to go in."
UnitedHealth, with a market capitalisation of $55.65 billion as of Thursday's market close, is the nation's largest health insurer. It joins pharmaceutical companies Pfizer Inc and Merck & Co among the Dow's healthcare stocks. Insurance is already represented by Travellers Cos, though UnitedHealth will be the only insurance stock with a healthcare focus.
"We believe it is an industry that needs to be represented in the Dow," said Blitzer, adding that the lack of a healthcare insurance stock was "something of an issue" for the committee.
"To me, it just shows the sector is gaining the kind of importance and visibility with the Street that it should be getting," said Ana Gupte, an analyst at Sanford Bernstein. "I think it's pretty clear that private-public partnerships are the future."
UnitedHealth's market cap is well below that of other companies seen as popular choices to become Dow components, including Apple Inc, the most valuable US company, and Google Inc.
"Google and Apple are very popular stocks, but given the way the Dow is calculated as a price-weighted index, they could potentially distort the Dow and I don't think we would be doing a service by adding them," said Blitzer.
Both Apple and Google have share prices above $600. International Business Machines, the fourth-biggest stock in the Dow by market cap, has a weighting of almost 12 percent in the index due to its $200-plus share price.
UnitedHealth shares rose 1.3 percent to $54.58 on Friday and are up 7.9 percent so far this year. Kraft slid 0.5 percent to $39.93.
Kraft has been in the Dow since September 2008, when it replaced American International Group Inc amid the financial crisis. Food stocks will still be represented in the Dow, which has 30 components, by Coca-Cola Co and McDonald's Corp.
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