(KFT) Did They Make the Right Pick in Dow 30 Shakeup?

The Dow Jones Industrial Average, arguably the most famous and oft-quoted benchmark of American stock performance, will be swapping one of its components in one week’s time. The index will be removing Kraft Foods (KFT) and putting in UnitedHealth Group (UNH), the largest firm by far in the ‘accident & health’ segment of the insurance industry.

The move comes as Kraft looks to split up into two firms with one focused on the grocery business, and the other zeroing in on the snacks business under the absurd name of ‘Mondelez’. The removal of Kraft also marks one of the shortest time periods ever on the Dow, as the food company was added in just 2008 in order to replace the plummeting AIG.

However, some are disappointed by the move to include UNH over other companies, with a few looking for the DJIA to include GOOG or AAPL instead. Unfortunately, these have their own issues, as their lofty share price would distort the price-weighted benchmark, forcing the index managers to look elsewhere.

Still, many are asking why another health care-focused firm? While it is true that the company operates in a different segment than other index components like JNJ or PFE, it is still, arguably, in the broader health care sector.  Clearly the health care segment is growing in importance to the broader American economy, but there are other choices that could have also been deserving of inclusion in the index.

After all, the benchmark is designed to be a broad barometer of the American stock market. How many health care and financial firms do we need to accomplish that?

It isn’t like there aren’t a number of other possible choices out there as reports suggest that half a dozen firms were considered before UNH was eventually chosen. Personally, I think some of the following firms’ segments could have made for interesting selections at this time:

  • Transports – Where are all the transportation stocks in the index? How about adding Union Pacific (UNP), Federal Express (FDX), or UPS?
  • eBay (EBAY) – Yes it is a little ‘old school’ in terms of tech, but it is at a decent price point and its PayPal service is increasingly important to the American economy. Plus, the company is pretty big with a roughly $65 billion market cap.
  • Monsanto (MON) – True, we already have DD in the index, but Monsanto arguably offers a different large cap play on the chemicals segment. This is especially true given the growing crop crisis and the importance of feeding an ever growing population.
  • Mining – With commodity prices surging once again, wouldn’t it be appropriate to think about including a firm like Freeport-McMoRan (FCX) or Newmont Mining (NEM)?
  • Bring back the cars! – Both General Motors (GM) and Ford (F) are bigger than the three smallest DJIA components, could we have brought back GM or looked at including Ford in the Dow?

What do you think; did the DJIA make the right choice in including UnitedHealth over the stocks listed above? Besides Google and Apple, which company should have been put in there instead?

Zacks Investment Research

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