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Kraft Foods To Be Replaced By UnitedHealth In Dow Jones Average

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The world’s second largest food company, Kraft Foods Inc (NASDAQ:KFT), will no longer be in the Dow Jones Industrial Average (Dow Jones Indices:DJI) benchmark. America’s biggest health insurer, UnitedHealth Group Inc. (NYSE:UNH), will be added at the 15th spot in the list of top 30. The S&P Dow Jones Industrial Average (Dow Jones Indices:DJI) Index states that the change will be effective on September 24.

Kraft Foods To Be Replaced By UnitedHealth In Dow Jones Average

Kraft Foods Inc (NASDAQ:KFT), which was added in September 2008, after replacing American International Group, Inc. (NYSE:AIG), will be leaving in just four years, one of the shortest tenures at Dow Jones. The last change in the list was made in June 2009, when The Travelers Companies, Inc. (NYSE:TRV) and Cisco Systems, Inc. (NASDAQ:CSCO) replaced Citigroup Inc. (NYSE:C) and General Motors Company (NYSE:GM) respectively.

According to the official S&P Dow Jones Indices statement, the decision to remove Kraft Foods Inc (NASDAQ:KFT) from the Dow average was made after Kraft announced plans to spin off the North American grocery unit on October 1st. The pinoff will reduce the market value of the Northfield, Illinois-based company, so it will be less representative of the index. The S&P Dow Jones Indices said it selected UnitedHealth Group Inc. (NYSE:UNH) because the company reflects the growing importance of healthcare in the U.S. economy.

“Putting UnitedHealth there makes a lot of sense,” said Peter Jankovskis of Lisle, Illinois-based Oakbrook Investments. “Health-care expenditures have become such a large part of the economy, and particularly health insurance.”

The Dow Jones average was created by Charles Dow, the co-founder of Dow Jones & Co, the company that publishes the Wall Street Journal. Originally, it contained only 12 stocks, but it was later expanded to 30 companies in 1928. S&P Dow Jones Indices says that the companies included in the average must show sustained growth and have an “excellent” reputation.

You might be surprised to know that the world’s most valuable company, Apple Inc. (NASDAQ:AAPL), is not a part of DJIA, though it represents the NASDAQ composite index and S&P-500. Bespoke Investment Group said in May that had Apple Inc. (NASDAQ:AAPL) been added to the Dow in 2009, Dow Jones Industrial Average would have been above 15,000 today.

Wells Fargo Research notes:

By our math, which does not account for any other external factors, the last three names added (The Travelers Companies, Inc. (NYSE:TRV), Cisco Systems, Inc. (NASDAQ:CSCO), and KFT; to the DJIA saw one week increases in volume of about $1.5 billion, which would equate to about 27 million shares of UNH or about double its normal volume. While this has no fundamental implications for UNH, it could affect how the shares trade from time to time.

Bottom Line: UNH being added to the Dow Jones Industrial Average should provide a shortterm positive move for the shares, but have a minimal longer term effect.

UnitedHealth Group Inc. (NYSE:UNH) stocks jumped 1.7 percent to $54.81, whereas Kraft Foods Inc (NASDAQ:KFT) is down 0.7 percent to $39.87. On Thursday, the Dow Jones closed at 13,539.86, just 625 points behind its all time high.

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