Warren Buffett’s Favorite Kraft To Replace Sinking AIG In Dow

As the financial sector continues to roil with uncertainty and unease, Kraft Foods Inc. (KFT) has been selected to replace American International Group Inc. (AIG) in the Dow Jones Industrial Average (^DJI).

AIG stock plunged today (Thursday) after the U.S. Federal Reserve’s $85 billion bailout of the flagging insurer, taking the 112-year old blue-chip stock index down with it.

“We are refraining at this point from adding another stock in the financial industry because of the extremely unsettled conditions,” said Robert Thomson, managing editor of The Wall Street Journal, regarding the change. “We realize this decision leaves the Dow Jones Industrial Average under-weighted in financials, and we will address this situation in due course.”

First created by Charles H. Dow in May 1896 as an index of just 12 stocks, the Dow has now become one of the most widely recognized indicators of the general health of the U.S. economy.

“When you think of a Dow stock, you think of a company with a stable, solid business model and an enduring franchise representative of the American economy. Kraft clearly fits that bill,” Christian Andreach, who helps oversee $18 billion at Manning & Napier Advisors in Fairport, New York, told Bloomberg News. “It should give the stock a short-term kick.”

New Dow components often get a short-term boost as fund managers purchase shares of the addition to rebalance portfolios that are managed against the index. Similarly, stocks that are replaced face downward price pressure as shares are sold.

Dow components are generally seen as the cream of the crop of the large-cap U.S. market. Kraft certainly fits the bill in terms of size with a market capitalization of $50 billion and sales of over $37 billion last year. But as a rather recent spin-off of former parent company Altria Group Inc. (MO), Kraft just doesn’t have the distinguished history of some of its new Dow peers.

While some questioned the choice, Warren Buffett has been a fan of Kraft for quite some time. The Oracle of Omaha’s Berkshire Hathaway Inc. ((BRK.A) (BRK.B)) purchased an 8.6% stake in Kraft earlier this year, making it the foodmaker’s biggest shareholder.

The last changes to the blue-chip stock index occurred in February of this year when Bank of America Corp. (BAC) and Chevron Corp. (CVX) replaced former Kraft parent Altria and Honeywell International Inc. (HON).

Posted in Categories: Contributor, External Research, Stocks, USA.

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