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Should you buy SA Reserve bank shares?

Household Finance

Should you buy SA Reserve bank shares?

Reading Time: 2 minutes

The South African Reserve Bank (SARB) has a very strange ownership structure in that ordinary members of the public can buy its shares. Shareholders are entitled to a dividend of up to 10c per share and shares can be bought or sold whenever a buyer and a seller agree on a price. Members of the public are allowed to buy up to 10,000 shares of the total 2 million shares in the Bank. Should you consider buying these shares?

If you want to make money, then no. If, however, you want to have the opportunity to shape Monetary policy, then yes.

The SARB does not intend to make a profit and even if it does make a profit; 90% of it is distributed to the government, and 10% used to pay dividends to shareholders. Since the Bank avoids making profits – there is a very good chance that the dividend paid to shareholders would be less than the 10c maximum that can be paid. You could end up getting a dividend of 3c in one year and say 8c in another year.

SARB shares are traded over-the-counter:

What does the above mean? Well, SARB shares are traded when a seller asks for a price that someone out there is willing to pay. This is termed the “over-the-counter” market. This market is different from markets such as the Johannesburg Securities Exchange (JSE) where trades happen almost instantly.  Selling or buying SARB shares can take a very long time. So, if you bought SARB shares but suddenly needed to access to your money, you could end up being forced to sell at a very low price.

Are SARB shares value for money?

Based on the trades occurring between the 31st of January 2017 and the 2nd of March 2017 – The SARB shares were valued at R3 a share. Based on a technique of calculating the value of a share called the “Discounted Dividend Model”, the SARB shares should have been valued at around R1.43 per share[1]. This implies that the shares are currently overpriced and cost double what they should be going for. Therefore, from an investment point of view, SARB shares are a very bad investment. There are, however, very good reasons why you might want to buy these shares.

SARB shareholders are entitled to vote for 7 of the bank’s 15 directors. Shareholders are also able to discuss the Bank’s Annual report and attend the Bank’s Annual General Meeting. Buying SARB shares is essentially a means to contribute to the country’s Monetary policy through these channels.

In short, owning SARB shares is more of a civic duty than an investment.

[1] The value was calculated using the Discounted Dividend Model assuming an annual dividend of 10c, a cost of capital of 7% (The repo rate and incidentally, the interest rate that investors could obtain risk-free on some money market funds) and a dividend growth rate of 0%. P = D/(r-g). These calculations ignore transaction costs and other expenses that could be incurred.

Author’s Disclaimer: The information contained in this article should not be construed as financial advice. Please contact a Registered Financial Advisor before making any financial decisions.

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Thando is currently the Group Actuary at Clinix Health Group, having previously served as Actuary in Discovery Limited's R&D Lab. Thando loves tech, design, reading and is very passionate about the development of the African continent. Thando also runs karykase.com, an omnichannel retail-tech startup. All views expressed are Thando's own and neither reflect nor are influenced by the views of affiliated companies.

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