The Dow Jones Industrials (INDEX: ^DJI) is unusual among market benchmarks for its stability. The Dow's managers have put together an impressive record of keeping turnover to a minimum, having made changes on just 10 different dates in the past 25 years.
Kraft's upcoming split of its North American grocery business and its global snack division put the committee that oversees the Dow in a tough spot. The snack business, to be renamed Mondelez, will have roughly twice the revenue of the grocery business, which will keep the Kraft name. One of the reasons for the split was to try to capture a higher earnings multiple for Mondelez, so most analysts expect Mondelez to end up with the lion's share of the pre-split Kraft's market cap.
But according to the committee that oversees the Dow, "Mondelez's reduced market capitalization and projected lower percentage of revenue generated from the U.S. makes the company less representative of the U.S. large-cap market space."
An interesting pick
Perhaps more interesting is the Dow's choice of UnitedHealth as a replacement. Other stocks were considered; a report from the Associated Press quoted Dow committee chairman and managing director David Blitzer as saying, "everybody has called up and whispered Apple (NAS: AAPL) in one ear and Google (NAS: GOOG) in the other." But with several tech stocks already in the Dow, there arguably wasn't room for another.
Meanwhile, adding the leading health insurance company gives the Dow a new spin on both health care and insurance. Moreover, with the Affordable Care Act's individual mandate boosting demand for insurance -- albeit with a host of new regulations -- UnitedHealth will likely get a lot bigger in the years to come.
The stocks reacted strongly to the news, with UnitedHealth up 2% in premarket trading and Kraft down about half a percent.
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The article Welcome the Dow's Newest Stock originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple, Google, and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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