Overview
Middlefield Canadian Income (MCT) offers investors exposure to Canadian equities, a market very different in composition to its southern neighbour, with financials, utilities and energy dominating, meaning that Canadian equities offer diversification from the tech-heavy S&P 500. Canada also has an equity-income culture more akin to the UK, and MCT offers investors a current dividend yield of 5.4%.
MCT’s most significant overweight has consistently been Canadian REITs, with a c. 25% exposure being about four times the benchmark. Manager Dean Orrico says that REITs continue to trade at discounts rarely seen during the 30 or so years since the REIT structure was introduced in Canada. But supply constraints and strong demand mean that underlying REIT earnings have been stable or grown even as discounts have remained wide for an extended period.
Dean has managed MCT since its IPO in 2006 alongside his colleague Rob Lauzon. He has been with Middlefield since 1996 and has over 35 years of investment experience. He also manages a specialist fund of REITs and is president and CEO of Middlefield Group. Dean has recently increased his personal stake in the trust as a sign of his growing conviction about MCT’s recovery potential. Furthermore, MCT’s gearing has recently increased to c. 21%, the top of the normal expected range for gearing, as the team’s conviction has increased.
MCT has a track record of stable and growing dividends and following a post-pandemic recovery in underlying earnings, the trust’s board slightly increased the dividend in 2023, and again in 2024, raising the target quarterly payment for the year ending 31/12/2024, giving MCT a yield of 5.4%.
Analyst’s View
Recent share purchases illustrate their conviction that there is very significant value in MCT’s portfolio, and in its discount. This is also evidenced by the trust’s gearing, which, at 21%, is at the upper end of its historical range. The team anticipates a soft landing for the Canadian economy, and highlights the recovery potential of the relatively high yielding equity market as a result.
Two themes that run through the portfolio are supply constraints and operational efficiency. Real estate is supply constrained within a growing population; new energy pipelines are hard to build and exploration for new sources of fossil fuels is expensive. As a result, many of MCT’s companies are focused on operational efficiency and growing dividends for shareholders. Similarly, Canadian banks have built a reputation for conservative balance sheets and have weathered the higher-interest-rate environment well. The team have recently moved to increase the trust’s weighting in the sector in anticipation of improving sentiment as the credit cycle eases.
MCT’s Dividend target was increased for the year ending 31/12/2024, following an increase in 2023, with dividends back to full cover following a dip in earnings during the pandemic. MCT’s dividend yield of 5.4% compares to the current yield on Canadian government bonds of c. 3.25%, a decline from 3.7% when we last met up with Dean at the end of the summer in 2023. This highlights how attractive the yield is at the current c. 19% discount.
Bull
- Strong recovery potential from large overweight in REITs
- A soft landing and cuts in interest rates for Canada look increasingly likely
- Wider than average discount
Bear
- Relatively high gearing for an equity income trust, which could amplify losses as well as gains
- Fossil fuel exposure may not suit all investors
- Performance is behind the benchmark, albeit significant active positions have recovery potential
Disclaimer
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. You will usually pay brokerage fees to your dealer if you purchase or sell units/shares of investment funds on the Toronto Stock Exchange or other alternative Canadian trading system (an “Exchange”). If the units/shares are purchased or sold on an Exchange, investors may pay more than the current net asset value when buying and may receive less than the current net asset value when selling them. There are ongoing fees and expenses associated with owning units or shares of an investment fund. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in these documents. Mutual funds and investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Certain statements in this disclosure are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may”, “will”, “should”, “could”, “expect”, “anticipate”, “intend”, “plan”, “believe”, or “estimate”, or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what Middlefield Funds and the portfolio manager believe to be reasonable assumptions, neither Middlefield Funds nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.
This material has been prepared for informational purposes only without regard to any particular user’s investment objectives or financial situation. This communication constitutes neither a recommendation to enter into a particular transaction nor a representation that any product described herein is suitable or appropriate for you. Investment decisions should be made with guidance from a qualified professional. The opinions contained in this report are solely those of Middlefield Limited (“ML”) and are subject to change without notice. ML makes every effort to ensure that the information has been derived from sources believed to reliable, but we cannot represent that they are complete or accurate. However, ML assumes no responsibility for any losses or damages, whether direct or indirect which arise from the use of this information. ML is under no obligation to update the information contained herein. This document is not to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument.
