Why Was Kraft Foods Removed from the Dow?

Why Was Kraft Foods Removed from the Dow?

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12/15/2012

Changes to the mix of companies listed on the 30-stock Dow Jones Industrial Average (DJIA) are relatively rare. In fact, the list of publicly traded companies has changed only 49 times since the Dow’s inception in 1896.

When Kraft Foods lost its place on the venerable market index recently to UnitedHealth Group Inc., it was the first change to the Dow’s composition mix since 2009. At that time, General Motors and Citigroup were replaced by computer networking equipment maker Cisco Systems and insurance provider the Travelers Companies.

S&P Dow Jones Indices, which manages the DJIA, said it dropped the Illinois-based maker of Cheez Whiz and Chips Ahoy! cookies after it announced plans to spin off its North American grocery business, making it a much smaller company in the process. The departure of Kraft does not leave the Dow without any food stocks in the mix—Coca-Cola Co. and McDonald's Corp. remain on the index.

Minnesota-based UnitedHealth Group, which operates the nation's largest health insurer, joins pharmaceutical companies Pfizer Inc. and Merck & Co. among the Dow's healthcare stocks. Because the formula used to calculate the Dow is recalibrated for each stock added and dropped, the addition of UnitedHealth Group will not cause a change in the level of the Dow.

Who Decides?

Kraft enjoyed a relatively short stay on the DJIA. The company was added to the list of Dow companies during the financial crisis in September 2008, replacing financially troubled insurer American International Group.

Ultimately, a small committee that includes the managing editor of The Wall Street Journal (which is owned by Dow Jones) decides which companies get added to and dropped from the Dow. To promote continuity, the selection committee tries to choose stable, highly capitalized companies that it feels can remain on the index over the long haul. Investors are then able to use the index to trace the impact of major events in the market with the same set of component stocks.

The Dow committee reviews the index at least once annually. Changes typically occur after mergers, corporate acquisitions or other dramatic shifts in a component company’s core business.

While there are no rules for component selection, a stock typically is added only if it has an excellent reputation, demonstrates sustained growth, is of interest to a large number of investors, and accurately represents the sector(s) covered by the average.

From Big Industry to Big Macs

The composition of the Dow has changed over time to reflect changes in the U.S. economy. The original list of 12 stocks reflected the heavy industrial companies that once dominated the economy—American Cotton Oil, U.S. Leather, and the Tennessee Coal, Iron and Railroad. Only one of these original dozen companies, General Electric, currently remains a Dow company.

Whether it’s Walt Disney or Walmart on the list, the performance of the 30 prosperous businesses that make up the Dow continues to provide investors with a sense of “how the market is doing.”

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates,Inc. (DLA). This material does not constitute an offer or recommendation to buy or sell securities and should not be considering in connection with the purchase or sale of securities. Member FINRA & SIPC.

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David Lerner Associates is a privately-held broker/dealer company with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates 1 877 367 5960 http://www.davidlerner.com

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