When investors say a company has a licence to print money, they usually mean it is very profitable. But in the case of Swiss National Bank, there is an actual licence to print money. Could this be why SNBN's shares were up 70 per cent over the past 12 months? And will the company continue to be a good investment?
Yes, SNBN really does have a printing press. As the central bank of Switzerland (official name: Schweizerische Nationalbank), it has a legal monopoly on creating Swiss francs. And it has shares trading on an exchange because the bank was founded in 1907 as a joint-stock company to give it independence from government.
Does SNBN just print up bundles of money to put in the profit column? Not quite. The primary mission, as with other central banks, is to control the quantity of banknotes in circulation in order to keep the domestic economy balanced between deflation and inflation. Earnings are a byproduct of this process.
Its stock currently trades close to 1,930 francs ($2,628) on the Zurich-based Swiss Exchange, nearly a 4-fold appreciation since 1990. Moreover, a dividend is paid by law each May in Swiss francs.
But there is a wrinkle. Some restrictions have been placed on the shares, and they shape how investors receive their returns.
According to the 2016 Annual Report, 48 per cent of the 100,000 shares outstanding are held by private investors. Voting rights are minimal to ensure private investors have little say in bank policy. Also, the dividend is capped at 15 francs.
The remaining shares, which trade infrequently, are held by Swiss cantons, official entities and cantonal banks. Profits left over after payment of dividends and reserves go to them. American depositary receipts (ADRs) trade in the United States in the over-the-counter market.
In short, private investors only get a dividend that is never raised. Not surprisingly, the SNBN website declares: "Movements in the price of the SNBN share resemble those of risk-free long-term bonds. …"
But there is interest in SNBN for reasons other than its bond-like returns. And those reasons may explain much of the recent runup in share prices. Let's look at three of them.
First, since Switzerland is a country with a long-standing reputation as a safe haven, SNBN's stock has appeal as a defensive investment. In the past year, the appeal may have increased due to heightened concerns over the viability of the European Union and the policies of U.S. President Donald Trump, among other things.
Second, since investment capital attracted to haven Switzerland puts upward pressure on the Swiss franc, the currency has a tendency to rise in value. This augments returns on Swiss assets held by foreign investors. For example, the average annual appreciation in the Swiss franc against the Canadian dollar has been 4 per cent since 2007.
Third, to offset upward pressures on the Swiss franc, SNBN has tried to discourage capital flows into Swiss assets by pushing domestic interest rates into negative territory. This makes SNBN relatively more attractive since its dividend provides a positive return.
In sum, SNBN's shares have appeal not so much because of the licence to print money. It just prints Swiss francs mostly to buy foreign bonds and stocks in order to offset demand for Swiss francs in currency markets. Any earnings growth from these operations accrues to the cantons and other official entities, not private investors.
Rather, SNBN is in demand as a dividend-paying, haven investment. There is also a good probability that currency appreciation will boost returns to foreign investors.
However, its shares have lately become expensive. A sign of this is the current dividend yield of 0.77 per cent, which is near the all-time low.
Value investors may thus want to wait for better prices before buying. The shares have a history of volatility and lower prices wouldn't be unusual at some point. Aggressive investors could consider buying now if they expect global turmoil to heat up more in 2017.
Larry MacDonald is an economist, author and financial writer. His website is at larrymacdonald.serveblog.net/home.