NEW YORK (Reuters) - UnitedHealth Group Inc (UNH.N) will replace Kraft Foods Inc KFT.O in the Dow Jones industrial average .DJI, putting the nation’s largest health insurer in the storied 30-stock index at a time when an aging U.S. population is making healthcare one of the strongest-growing segments of the economy.
UnitedHealth joins pharmaceutical companies Pfizer Inc (PFE.N) and Merck & Co (MRK.N) among the Dow’s healthcare stocks. Insurance is already represented by Travelers Companies Inc (TRV.N), 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 David Blitzer, chairman of the index committee at S&P Dow Jones Indices in New York. On a conference call, Blitzer said the absence of a healthcare insurance stock was “something of an issue” for the committee.
The group has been volatile in recent years because of President Barack Obama’s healthcare reform law, and because of aging U.S. population demographics, which could increase demand for long-term healthcare options.
“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 in New York. “I think it’s pretty clear that private-public partnerships are the future.”
The move is effective at the close of markets on September 21, S&P Dow Jones Indices said on Friday.
The Dow industrials have been in existence since 1896, devised as a way to keep track of overall trends in the market. These days, the broader S&P 500 Index .INX .SPX is considered a more accurate barometer of the market.
Still, the Dow’s limited membership of 30 stocks and the infrequent changes in the average make its composition a popular topic among market enthusiasts.
UnitedHealth’s market cap of more than $55 billion is well below other companies that are seen as popular choices to become Dow components, including Apple Inc (AAPL.O), the most valuable U.S. company, and Google Inc (GOOG.O).
“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, referring to how the price of each component in the blue-chip average determines its weighting, with the most expensive shares having more influence.
Both Apple and Google have share prices above $600. International Business Machines (IBM.N), the fourth-biggest stock in the Dow by market cap, has a weighting of 11.8 percent in the index due to its $200-plus share price, however that will drop to 11.71 percent after the changes.
UnitedHealth will have a weighting of 3.06 percent when it is added, according to Birinyi Associates.
Shares of UnitedHealth were up 0.1 percent at $53.93 on Friday afternoon, are up 7.9 percent so far this year. Kraft shares were down 0.5 percent at $39.93.
The removal of Kraft follows the company’s plan to split itself into a snack company called Mondelez International and a North American grocery business with the Kraft name.
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.”
Kraft’s tenure in the Dow was a short one, as it had been there only since September 2008, when it replaced American International Group Inc (AIG.N) amid the financial crisis. Food stocks will still be represented in the Dow by Coca-Cola Co (KO.N) and McDonald’s Corp (MCD.N).
Additional reporting by Anna Yukhananov in Washington; editing by Leslie Adler, John Wallace, Sofina Mirza-Reid and Matthew Lewis