The new entrant into Germany’s blue chip index isn’t very blue chip

We have a new entry into the DAX 30 -- Delivery Hero, which last week replaced Wirecard on the list of Germany’s biggest stocks.

The Berlin-headquartered company has several food delivery platforms operating across Europe, Asia, the Americas, and the Middle East and Africa region. Like others in this slice of the ‘tech’ sector, it is struggling to get into the black. Via the FT’s Frankfurt correspondent Joe Miller:

While the platform provider expects to break even in Europe this year, it is yet to make any money or indicate when it intends to become profitable; much less pay a dividend. Despite almost doubling its revenue to €1.2bn and expanding its business in its core Asian market by approximately 170 per cent, Delivery Hero lost more than €660m last year.

Not an ideal candidate then for an index which is both supposed to symbolise Germany’s corporate establishment, and be a source of dividends for income funds.

It would be churlish to single out Delivery Hero, or the compiler of the DAX 30 list, Deutsche Börse, here. The inclusion of the likes of Ocado in the FTSE 100 speaks to a similar problem in the UK.

One could also argue that even the bluest of blue chip stocks, such as Royal Dutch Shell, are not paying dividends* at anywhere near their usual level at the moment. And investors in another DAX 30 staple, Deutsche Bank, have not received a decent payout since 2008. Yet lack of profitability at food delivery companies like Delivery Hero and Ocado appears chronic, more a feature of the business model than fluctuations in the business cycle.

As Miller’s story points out, Delivery Hero’s books look similar to those of companies in the sector from Shenzhen to Silicon Valley. Though the firm states that profitability is the eventual aim, far bigger rivals are yet to go into the black. This creates a problem for prestige indices that are supposed to symbolise steady returns, and not the sort of super-charged stock performance that one might expect on a more tech-focused index like the Nasdaq.

The origins of the problem lie in the criteria for inclusion, which attach a great deal of importance to market capitalisation and liquidity, and little to profitability. A spokesman for Deutsche Börse said the exchange was looking into the DAX 30 criteria:

After the recent adjustment of the Insolvency Rule [which led to Wirecard’s dismissal], we are undergoing a more fundamental review of the DAX rules. For this purpose, we will discuss our proposals with the Advisory Board for Equity Indices (“Arbeitskreis Aktienindizes”) at the end of September and then launch an extensive market consultation. The results will be announced by the end of the year.

If the rules changed to focus a little more on profitability, then Symrise, a company in the rather less glamorous sector of food flavouring and fragrances which has been profitable for 13 of the last 15 years, would have been a more obvious contender for inclusion.

It is, of course, far better to have a company in the DAX 30 that declares losses honestly than one that lies about having almost €2bn in cash on its balance sheet.

Delivery Hero could also become the exception to the rule and grab enough market share to raise the price of its services and reverse its history of losses. However, even if that does happen, it’s likely to take some time yet. In the meantime, compilers of blue chip indices might want to consider placing a little more weight on profit margins than they do right now.

*Amended to reflect that Shell is paying a lower divided, not no dividend at all.

Related links
Ocado: Show me the money – FT Alphaville