That's Just Un-American
Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
2012 is shaping up to be quite a year for the healthcare industry and not only for public policy but also the financial markets. Yes it will go down in the history books as the year that Obamacare passed, which promises to alter the landscape for insurers and other healthcare providers for generations to come. But the financial markets' relationship with this sector became more committed when the index committee revealed that UnitedHealth Group (NYSE: UNH) would replace Kraft Foods (NASDAQ: KFT) in the Dow Jones Industrial Average on September 21. The reason? Kraft's focus on America is dwindling.
Index representatives told CNBC that the reason Kraft is out after replacing the then beleaguered AIG in 2008 is that its domestic influence is diminishing. More than half of Kraft's business is generated outside of the U.S. and that is not the message that the Dow committee wants to send to the markets. Since joining the Dow four years ago to the month, Kraft shares have gained some 15% while AIG - for all its woes - shed 4% since its exit.
Healthcare, of course affects everyone and is among the drivers of the economy and financial markets. But does it represent America? The name drums up visions of curmudgeons in my head, which I'm sure is not the intention of the index committee.
It can be argued that the Dow needs to reflect technology's influence on the U.S. economy, and therefore a stock like Apple, which continues to set new highs, should be included were it to decide to an eventual stock split. While the Dow has some old-school tech names, including IBM and Hewlett Packard Company (NYSE: HPQ), PCs no longer represent a high-growth segment given the tablet revolution.
H-P's Meg Whitman insists that the PC era is not over. She does admit, however, that the company must develop its version of a smartphone to remain competitive, which could work for the confused brand. Something H-P is not confused about its dividend, which the company recently raised by 10%. Whitman recognizes there are investors who are in the stock - which is off its 52-week high by almost 40% - because of that distribution and says that the payout "may increase over time," according to Fox Business.
But when it comes to the Dow, American representation is more important to the index committee than technology representation.
The Dow is the most widely considered index when considering US stock market activity. It has earned itself colloquial references, like the 'Dow 30' and even its own dividend strategy in the 'dogs of the Dow.' So does UnitedHealth Group really deserve a spot in this major index that already has representation stemming from the pharmaceutical and health insurance sectors?
Hedge funds have reportedly been trading UNH heavily in the past month and making money. But UnitedHealth Group has climbed from a low point of $17.90 in 2009 to trading above $55 per share today. Does the stock really have room to run and support the Dow's path to new levels, especially when there is so much political uncertainty surrounding the US for nearly another two months? The Dow is on a tear of late, revisiting 2007 levels, posting multi-session gains and accumulating some of its largest weekly gains that the markets have seen in months.
And if Kraft is out because of its diluted representation of America, is replacing the iconic consumer brand with a healthcare giant that paints the picture of aging Americans really a good idea? The S&P Dow Jones Indexes thinks it is and offered this statement about the decision:
“The Index Committee believes the addition of UnitedHealth Group brings added health care diversification to the Dow Jones Industrial Average, and reflects the growing importance of health care spending in the U.S. economy.”
Whether Wall Street and investors will welcome UnitedHealth Group as a Dow component remains to be seen. But like it or not healthcare deals in the capital markets keep unfolding and the changing landscape is enough to earn one industry bellwether the Dow distinction. Perhaps we will have to wait for a new generation of index committee members before we will ever see the likes of Google elbow its way into the index. Given that the once all-American Kraft brand has been booted because of its loyalties I venture to guess it could happen
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