Middlefield Canadian Income 22 August 2023
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Middlefield Canadian Income. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
To provide shareholders with a high level of dividends and capital growth over the longer term, by investing in companies and REITs domiciled in Canada and listed on a Canadian Stock Exchange.
Middlefield Canadian Income
Middlefield Capital Corporation
Dean Orrico; Rob Lauzon
Association of Investment Companies (AIC) Sector
Dividend Distribution Frequency
Latest Market Capitalisation
Latest Net Gearing (Cum Fair)
Latest Ongoing Charge Ex Perf Fee
(Discount)/ Premium (Cum Fair)
Daily Closing Price
Middlefield Canadian Income (MCT) offers investors exposure to Canada, an equity market often overlooked by UK investors despite the historical relationship between the two countries. Canada is a G7 economy adjacent to the US but with a very different sector make-up to its equity market, and a much stronger equity income culture, which is reflected in MCT’s yield of c.5.0% . The largest sectors in MCT’s benchmark are financials, utilities, energy, and pipelines, which gives a strong sense of the difference compared to its tech-heavy southern neighbour. MCT has exposure to all these sectors, but its most significant overweight has consistently been to Canadian REITs, with a c. 24% exposure being about four times the benchmark. Manager Dean Orrico says that REITs are trading at average discounts only seen twice before during this century and that underlying earnings have been stable or rising even as discounts have widened.
Dean has managed the trust since its launch in 2006 together with 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.
MCT has a track record of stable dividends and following a post-pandemic recovery in underlying earnings, the trust’s board slightly increased the dividend in 2023, with full dividend cover now restored, giving a current yield of c. 5.0% . The trust is normally geared in the range of 15-20%, and gearing currently sits in the middle of this range. The discount is c. 14%, which is a little wider than the five-year average of 13%.
MCT is sticking to its guns with its allocation to Canadian REITs for reasons that will sound familiar to UK investors. We explore this in the Portfolio section, but essentially, constrained supply and strong occupier demand have been temporarily overwhelmed by rising interest rates, leading to REITs trading on historically wide discounts. So just like in the UK, investors will need to be patient, as there’s unlikely to be a proverbial bell rung at the exact inflection point where REIT share prices start to perform. In the meantime, dividends have been held or increased. At 24% of MCT’s portfolio, we think a recovery in REIT prices is the most likely source of outperformance and discount narrowing in the near term.
MCT is also exposed to some other strong themes, notably energy, where Canada is a major exporter, with new infrastructure coming into service to accelerate that. Dean says that Canadian producers are very focussed on production efficiency, which has translated to strong dividend growth. Additionally, Canadian banks have maintained their reputation for stability, even during the recent mini-banking crisis in the US, and this remains an important sector for MCT, even at a slightly underweight position.
As we discuss in the Dividend section, MCT’s dividend increased this year as underlying earnings bounced back from the pandemic years. The yield is currently c.5.0%, which compares to c.3.7% on ten-year Canadian government bonds, and 3.5% .for the Canadian equity market, illustrating MCT’s key attraction as an equity income trust.
- Strong recovery potential from large overweight in REITs
- Exposure to an overlooked G7 economy with strong long-term growth trends
- High dividend yield compared to local equities and bonds
- Relatively high gearing for an equity income trust
- Large exposure to fossil fuels may not suit some investors
- Portfolio concentrated three main sectors, albeit very different to neighbouring US market