Middlefield Canadian Income 10 November 2022

Middlefield Canadian (LON:MCT) offers a straightforward proposition to investors: exposure to Canada, a G7 economy adjacent to the US but with a very different sector make-up to the US. The Canadian equity market has a strong culture of equity income, and MCT has a consistent dividend record. MCT’s historical dividend yield is 4.2%.

MCT’s portfolio is concentrated in energy, real estate and financials, all three being important sectors for Canadian equities. One of the biggest geopolitical issues of the last year has been energy security, and Canada is a net energy exporter that is consequently running a trade surplus. Higher energy prices have played a role in this, but Canada’s status as a stable democratic economy means it is arguably also selling stability and security to its neighbours and allies.

Canada has immigration trends that MCT’s manager, Dean Orrico, argues should secure the real estate sector as a long-term anchor of the Canadian equity market. A points-based immigration system prioritises ‘economically active’ individuals and there is a resulting shortage of housing and other real estate. This is a core area of expertise for Dean and also for Middlefield International, which runs several specialist REIT mandates alongside MCT. Canadian banks typically have high capital ratios, and the major Canadian banks held their dividends during the financial crisis and more recently during the pandemic. They are now benefitting from more profitable lending from higher interest rates.

MCT has a track record of stable dividends and has seen a strong recovery in underlying earnings since the end of the pandemic as portfolio dividends have been restored or even increased. It uses a flexible gearing facility, allowing it to navigate through different periods of volatility.

MCT could provide strong diversification to an income portfolio, giving UK investors a relatively unique opportunity to gain exposure to Canada, a developed market with differentiated economic factors, such as net exports of energy and an immigration system which has a positive impact on demographics. One of the most pressing geopolitical issues of 2022, energy security, looks set to be an enduring one, and Canada provides a stable source of energy, now supplying over 50% of US oil and gas imports.

Dean notes that this year’s sell-off in REITs has created buying opportunities in some of the larger REITs already in the portfolio. Where he believes that long-term trends are still intact and balance sheets are conservative, he has been buying REIT shares at 40%-plus discounts. He also sees valuations in financials, which are at levels similar to those last seen in the financial crisis. With underlying valuations so low and MCT trading on a double-digit discount, Dean has recently increased his stake in the trust, buying 70,000 shares in October. He goes on to note that even if you adjust for technology stocks, the Canadian market trades at a P/E discount to its US neighbour of two or three turns . While there may be no short-term catalyst to close this discount, for an equity income investor, lower price ratings give greater choice when constructing a portfolio.

MCT has a historical yield of 4.2% and has consistently paid annual dividends of 5.1p per share in equal quarterly instalments since 2017. We think its diversification, steady dividends (even through the pandemic) and 13% discount could appeal to an income-seeker looking to diversify their portfolio.