Posted on 09/20/2012
On September 24th, 2012, shares of UnitedHealth Group [UNH] will replace Kraft Foods [KFT] within the Dow Jones Industrial Average [DJIA]. This is the first change to the 116 year-old stock market benchmark since June 2009, when Cisco Systems [CSCO] and Travelers [TRV] were added to the portfolio of 30 US "Blue Chips" at the expense of General Motors [GM] and Citigroup [C]. The outgoing change to the Dow Portfolio is simply a function of Kraft spinning off its North American grocery business, while the incoming change is always one that is discussed with greater scrutiny.
Is the addition of the nation's largest Healthcare provider a statement regarding the growing role of such services within the US economy? Certainly that was part of the decision to place UNH in the Dow 30, but probably not the entirety of it. One thing is rather clear - it can not be said that UNH is the most economically-important US company that was not already counted among the Dow 30. The table below is comprised of only US-based companies, and only those that have a dividend yield of 1%. A specific dividend yield is not a documented rule for inclusion within the Dow Industrials, but there is only one current component with a yield beneath 1% (Bank of America [BAC]), and it has historically been a much higher yielding stock. The table is sorted by order of market cap, and we see that UnitedHealth is the 17th largest (by market cap) company not already in the Dow.
The obvious alternative is, of course, Apple Inc. [AAPL], which has the largest market cap of any company in the world, and 11 1/2 times that of UnitedHealth. There are a few reasons that the Dow would not move toward including Apple, however, one of which being that the index has historically been reluctant to add high-end technology to its lineup. This is not atop the list, as we'll mention in a moment, but it was rather famously not until November 1999 that Microsoft [MSFT] and Intel [INTC] were added to the Dow. This was, of course, not the ideal opportunity to ramp up one's technology commitments. The last round of changes to the Dow Index came in June 2009, and Cisco Systems [CSCO] was among the stocks added to the index. That, as it turns out, was not a great addition in terms of the performance of the Dow. CSCO has fallen -4% since being added, doing so in a market environment where the Dow Industrial Index has gained 55%. When CSCO was added to the Dow, it was #57 on the Fortune 500 list. Just a few spots beneath it at the time sat Apple Inc. [AAPL] at #71. A few years later, and fully utilizing the benefits of hindsight in so doing, we can see just what a difference one Dow pick can make.
So, "what if" the Dow had chosen Apple Inc. instead of Cisco Systems back in June 2009? Where might the Dow Industrial Average be today? This is an interesting question, one initially posed by a client of ours a few weeks ago, and one we thought timely to answer given the change that was just announced to the Dow recently. And so let's "make a movie" and presume that instead of adding Cisco Systems back in June 2009, the Dow had instead added Apple Inc. The charts below are constructed, as close as is reasonable for today's purposes, in such a way as to show that exact difference (Verizon spun off New Communications Holdings Inc. in 2010, causing a very minor change in the Dow's divisor, which we did not incorporate in this study).
(Click to Enlarge)
Had AAPL been added to the Dow in June 2009, it would have been added as the largest holding in the Dow at the time. Keep in mind this is a price-weighted index, and so the stocks that trade at the highest price (currently IBM) have the greatest impact upon the index with a similar percentage move. AAPL was $145 back on June 5th 2009, well above the 2nd highest price stock (IBM was $107), and thus AAPL would have been 11.2% of the Dow. While CSCO shares have fallen -4% since June 2009, shares of AAPL have instead rallied 384%. By virtue of that move and the manner by which the Dow is calculated, AAPL would represent a 28% weighting within the Dow today! More importantly, had one small change been made a little more than 3 years ago, the Dow Jones Industrial Average would be 3,000 points higher than it is today!
Of course, that is with the benefit of hindsight, and who could have known that Apple would be such a better stock to own than CSCO since June 2009. Then again, when the DWA Technical Leaders Portfolio [PDP] re-calibrated on June 30th 2009, it was Apple Computer [AAPL] that was among the top weightings of the fund, while Cisco Systems [CSCO] was nowhere to be found within this portfolio of 100 stocks. AAPL has never fallen out of PDP since June 2009, CSCO has never gone in. That may not account for all of PDP's 33% of outperformance over the Dow since June 5th, 2009, but it certainly hasn't hurt.
**Return numbers are based on pure price performance, not inclusive of dividend, fees, or expenses.