While the dropping of Kraft (KFT) from the Dow Jones Industrial Average may not be a surprise--given the food company's spin-off plan would drastically reduce its size--the addition of UnitedHealth (UNH) signifies the growing influence of the healthcare insurance industry on the U.S. economy.
While pharmaceuticals are well represented on the Dow by industry giants like Pfizer (PFE), Merck (MRK), and Johnson & Johnson (JNJ), the index does lack an insurance company focused in healthcare.
Kraft was added to the Dow industrials in September of 2008, replacing AIG (AIG). Since its inception in 1896, the index has changed components 49 times, with the most recent move being in 2009 when Travelers (TRV) replaced Citigroup (C), and Cisco Systems (CSCO) replacing General Motors (GM).
Of the possible candidates that could have replaced Kraft, the most notable names on the list include Apple (AAPL) and Google (GOOG). However, due to the fact that the Dow is based on a price-weighted average, the two tech giants may have skewed the calculation of the index. Apple, the most valuable company in the world's history by market cap, already carries disproportionate influence on the cap-weighted S&P 500 as well as the Nasdaq.
UnitedHealth's inclusion into the index will take effect on September 24, and is not expected to change the level of the Dow. UnitedHealth is currently trading at around $54 per share and has a market cap of $55.7 billion. Kraft currently is trading around $40 per share, and has a market cap of about $70.8 billion. The spin-off of its North American grocery business is expected to be completed by the end of 2012.
Calculating the Dow
The stock index was originally calculated by totaling the prices of all of the stocks in the DJIA and then dividing that sum by the total number of stocks in the Dow. The same basic calculation is done today, but the divisor is no longer the total number of stocks in the DJIA.
The divisor has been adjusted over the years to reflect changes to the stock index since its founding. Stocks have been added to the Dow, and some companies have split their stock one or more times. Other companies have gone out of business and been removed from the DJIA.
The divisor is recalculated after any change is made to the stock index. The divisor for the Dow is published daily by the Wall Street Journal.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer