If you’ve paid even scant attention to the financial news in the last few weeks, all you’ve heard about is QUANTITATIVE EASING this and APPLE STOCK MOVEMENT that. Meanwhile the Dow switched out a component, something it does less than annually on average, and it barely made a sound.
At the risk of insulting our readers who already know this, the Dow Jones Industrial Average is nothing more than the share prices of 30 particular major stocks, added together and multiplied by a constant. The 30 companies represented aren’t precisely the 30 largest in the nation, but they’re close enough. When Dow Jones & Company determine that a company is no longer fit or worthy to comprise part of the DJIA, that company gets booted and another one replaces it.
Recent companies to get demoted from the DJIA include taxpayer charity cases American International Group and General Motors. The most recent company to fall off the index had a legitimate extenuating circumstance, however.
Kraft Foods replaced AIG 4 years ago. Earlier this year Kraft, maker of everything from Jell-O to Miracle Whip to Maxwell House coffee, announced that it would be splitting itself in two. To summarize and greatly simplify the restructuring, the international unit is now called Mondelez. The American grocery business maintains the Kraft name. Both companies now trade on NASDAQ.
Which left a vacancy, to be filled by UnitedHealth. (Yes, Microsoft Word, we did spell it correctly. It’s not our fault that medial capitals are unavoidable these days.) UnitedHealth is a managed-care company out of Minneapolis, founded 35 years ago. By revenue it’s the 22nd-biggest public company in the United States, almost twice the size of the formerly 50th-place Kraft. By profit, UnitedHealth is 29th (the erstwhile Kraft was 43rd.)
Why a boring HMO parent and not something cool like Apple? The chairman of the index committee says that technology stocks are “well-represented” already. He might have a point – there’s IBM, Microsoft, Cisco, and maybe you can consider AT&T and Verizon to be technological. Even the beleaguered Hewlett-Packard, whose stock is at an inflation-adjusted 20-year low, remains part of the Dow.
What does this mean for the ordinary investor? (That’s you, Sweet Boy or Babycakes.) Well, among other things it means that certain stock funds that mirror the Dow now have to have a position in UnitedHealth. But UnitedHealth is a mammoth corporation that said funds probably already had a piece of anyway. UnitedHealth has gained about 10% since it joined the Dow last month, but as we all know, or should know, a 10% change in price over so brief a period means almost nothing. UnitedHealth has been aggressive since joining the Dow, recently spending $5 billion to buy the largest health insurer in Brazil.
Which you can interpret as a tiny bet on Mitt Romney winning the presidency and, if we’re to believe his campaign promises, proposing to have Congress repeal ObamaCare. Or you can interpret it as a bet on President Obama being reelected, which would mean that American managed health care companies are going to need to expand into foreign markets as socialism does to their industry what it’s done to every industry it’s ever touched.
UnitedHealth went public in 1990 and enjoyed the kind of steady, constant growth that most prudent executives would love to see their companies emulate. The stock topped out in late 2005, lost 2/3 of its value by 2009, and has since rebounded to near that previous high. UNH trades at about 11½ times earnings, which is slightly less than contemporary Cardinal Health (13). The “target estimate” for UNH’s stock price is a 20% increase next year, but then the “target girlfriend” for your average World of Warcraft player is something more grandiose than what reality might offer up.
Net income for UNH has increased from year to year, and the company currently boasts a 5% profit margin. Cardinal Health’s is 1%. Retained earnings are high and increasing, albeit not at a tremendous rate – certainly not as fast as revenues and profits. The company has no treasury stock to speak of. On balance, taken together those are slightly positive signs for investors looking to buy and hold.
But you’re not going to buy UnitedHealth stock anyway, are you? No, you’re going to keep funding your 401(k) and electing to receive the employer match if yours offers it. That’s fine, too. UnitedHealth’s biggest single shareholder is Fidelity Investments, which owns 7½% of the company. That’s $4.4 billion worth of UnitedHealth, which is an awful lot to be distributing among Fidelity’s various funds. And among those, Fidelity’s Low-Priced Stock Fund holds the most – about 30% of Fidelity’s UnitedHealth holdings. UnitedHealth is also the biggest component of said fund, which is a slightly different superlative. And, the Low-Priced Stock Fund is up 26% from a year ago. It’s doubled since 2009 – just like the stock market itself. Will investing in a fund that predominantly features UnitedHealth make you rich? Probably not. Becoming one of UnitedHealth’s approximately 16,000 shareholders of record might.