Health insurance company UnitedHealth Group (UNH) has been tapped to take the illustrious position in the Dow Jones Industrial Average that is being vacated by Kraft Foods (KFT – Free Kraft Stock Report), the giant processed foods company. The Dow 30 is the most widely known and tracked barometer of the U.S. stock market.
UNH offers products and services to more than 70 million individuals through its two operating segments: United Healthcare provides network-based health care benefits and Optum focuses on information and technology-based health services. Coincidentally, Kraft Foods is being dropped from the index because it will be spinning off its North American grocery business in October.
The change, which will go into effect at the start of trading on Monday, September 24th, reflects the growing importance of health care spending as a component of the U.S. economy. The Affordable Care Act enacted by the Obama Administration and, more recently, approved by the Supreme Court, should result in 32 million more Americans having healthcare coverage and give the medical services industry as a whole a noticeable boost. UNH stock rose slightly once this announcement was made.
We think UNH is a solid selection for inclusion given its strong track record for revenue, earnings, and dividend growth, plus its financial position is strong. It has strong leadership on the managerial level and bright prospects for years to come, which should be enhanced by the aforementioned reform.
The alteration will not affect the level of the Dow, as the formula used to calculate it is recalibrated for each stock added and dropped. On that note, this is the first change in the index since June of 2009 when Cisco Systems (CSCO – Free Cisco Stock Report) and Travelers (TRV – Free Travelers Stock Report) were brought in and General Motors (GM) and Citigroup (C) were dropped due to their precipitous declines during the recession and coincident bear market. Similarly, Kraft Foods had come on board in September of 2008 when American International Group (AIG) left due to its hard times.
On a separate note, many pundits had been clamoring for the inclusion of technology behemoths Apple (AAPL) and/or Google (GOOG) in the Dow 30, but we can see why the selection committee has passed on those equities given the index’s already substantial technology position. Moreover, due to their lofty stock prices, and the fact the calculations used to formulate the index give extra weight to a higher quotation, stock splits would certainly have to come into play at some point.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.