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QD view – Canada’s answer to UK dividend drought

Canada’s answer to UK dividend drought – Middlefield Canadian Income Investment Trust (MCT) gave an update on its portfolio performance and wider market conditions on 14 October 2020. The US presidential election and Covid-19 were dominant themes.

MCT’s views – expressed on the video call by Dean Orrico, lead manager and president of Middlefield International Limited – reflect prevailing orthodoxy. Joe Biden will probably win the presidency and is increasingly likely to win well. Democrats may hold sway in the House of Representatives and, possibly but less likely, the Senate. The pandemic threats are better understood and therefore easier – but not easy – to control. Covid-19 has accelerated shifts in e-commerce and home working that were under way before the pandemic struck.

Caution underpins MCT’s approach but the dividend picture breeds a confidence, even a bullishness, on the outlook. While 72% of UK FTSE 350 dividends have been cut, only 20% of Canadian TSX-quoted capital has suffered the same fate. The figure is 15% for the US S&P 500. More encouraging, perhaps, is that the yield on the Canadian index is 3.2%, similar to the UK but nearly double the US.

London-listed MCT aims to provide long term returns through dividend income and capital growth from a diversified portfolio of predominantly Canadian equity income securities and US stocks. US equites make up around 35% of the whole at present. The predominant Canadian content sets MCT apart from peers North American Investment Trust (NAIT) and Blackrock North American Income Trust (BRNA). NAIT, managed by Aberdeen Standard, has c11% in Canada with the remainder US. BRNA is nearly three-quarters US and invests the rest in Europe.  Sanofi from France and the UK’s BAE Systems were among its top ten holdings at the end of August. It had only 0.5% in Canada at that time.

As MCT reckons, markets have to swallow potential rises in corporate and personal tax rates that will come if Biden moves to the White House and meets pre-election pledges. There may be added burdens in terms of regulation. Orrico noted, however, that Biden’s proposed tax rates are lower than those prevailing under President Barack Obama. Besides, other measures should give equities positive impetus. More fiscal stimulus is likely whatever the outcome. If Biden wins the renewable energy sector will win; there will be fewer tensions in international trade relations; more immigration; and better national co-ordination of Covid-19 responses.

MCT has 21% exposure to Real Estate, 20% in Utilities, 18% in Financials and 10% Healthcare. In Real Estate, MCT had moved away from vulnerable office and retail properties before Covid struck. As a holder of industrial space specialist Granite REIT, among others, MCT has found a useful e-commerce proxy. Property consultant CBRE recently published research indicating that every US$1 billion of added internet sales requires 1.25 million extra square feet of warehousing. Orrico said that recent rent reviews have been agreed at 10% better rates.

In Utilities, MCT has positions in renewables via stocks including Northland Power and Brookfield Renewable Partners. The latter has generating capacity sold directly to users rather than via a grid. Facebook is one such customer. More than half MCT’s exposure to Utilities is in renewables. Northland and Brookfield shares are up 40% year to date on a relative basis. Canada is well placed to benefit from the now-global response to climate change threats. Around 20% of its energy needs come from renewables compared to 10% across the OECD.

MCT is encouraged that Canadian banks fared well through and past the 2008 Financial Crisis. US banks also seem to have learned important lessons while stringent capital requirements from regulators has helped. The Fed’s ‘low for a longer time’ interest rates policy is supportive and, eventually, may seed interest rate margin benefits for banks. There is strength in wealth management, said MCT. CIBC and JP Morgan are among MCT’s holdings in Financials.

As for Healthcare, the pandemic is providing no shortage of business. MCT said the sector is likely to: “lead us out of the crisis and facilitate a return to normal economic activity.”

MCT’s NAV is down 10% year to date, up 40% over five years and up 90% over ten years. At the close of business on 13 October 2020 the shares were trading at a 17% discount. It was 11% at the start of 2020. MCT has missed out on some areas of notable recent capital growth – such as IT – because of the lack of dividend payers. It does own Microsoft, however.

While MCT’s NAV has taken a hit year to date, the dividends have kept coming. Only one of MCT’s large-cap Canadian and US quoted companies shelved its dividend and that stock – Chorus Aviation – has been sold. That allows MCT to suggest it will sustain its own dividend payments. Sure, the 6.4% yield is inflated by the falling share price, is less meaningful to longer term holders of the shares, and is a moderately bearish signal in its own right. It also suggests there is decent value in MCT shares if general economic hopes come good.

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