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Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund (MFD) was the big cutter this week, reducing its distribution by -16.7%, from $0.30 to $0.25 per quarter. As stated in the press release, the reason for cutting the distribution was as follows:
In seeking to balance the Fund’s objectives of providing a high level of current return consisting of dividends, interest and other similar income while attempting to preserve capital, we believe a reduction in the distribution from $0.30 per share to $0.25 per share will bring the distribution more in line with the expected current earning potential of the Fund.
The upcoming ex-date for the reduced distribution is on May 22, 2019. The $0.30/quarter distribution had previously been maintained for about three years, with the dividend level before that being $0.35/quarter.
Why was it cut?
As is often the case with equity CEFs with a managed distribution policy, the distribution had to be cut because of lack of capital appreciation of the underlying holdings to support the payout. The following chart shows the NAV and quarterly dividend of MFD over the last five years (the final drop in dividend was manually added by me since the new, lower dividend hasn’t actually been paid yet). We can see that MFD’s NAV has dropped by around -40% over the last 5 years, necessitating a reduction of payout to avoid further NAV erosion.
The market response to the dividend cut was swift, with the fund falling -3.91% on the day (the intraday low exceeded a -5% drop). Over the week, MFD lost -4.56% in premium/discount valuation, second only to NexPoint NexPoint Strategic Opportunities Fund (NHF) which lost -5.36%.
I’d like to thank acamus for the timely alert on MFD’s cut in the evening after it was announced after-hours. I then suggested that one might consider selling MFD at the open on the next day at an orderly price if possible. And indeed, MFD traded only slightly down (-1.5%) for the first few hours of trading, before the market “realized” the distribution cut and the price plunged sharply downwards.
I know at least one member who managed to get out in the pre-market at $11, and they now have a chance to buy back the fund 4% lower, or if not, consider themselves having saved a nice 4% on their position.
Why did I fear a significant price drop in MFD? As I mentioned in the chat message, MFD’s discount of -2.35% before the cut didn’t leave much of a cushion, especially when compared to its 1, 3 and 5-year averages of -4.59%, -5.98% and -6.29% respectively. After shedding some of its excess valuation, MFD is now back to a -6.91% discount, slightly lower than its historical averages.
We still prefer MGU over MFD
This raises the question: why was MFD trading at such tight discount in the first place? Between the two Macquarie global infrastructure closed-end funds, I’ve usually preferred Macquarie Global Infrastructure Total Return Fund (MGU) (which we own in our Tactical Income-100 portfolio) over MFD because of its superior performance.* Yet, MGU has consistently traded at a very wide discount (-currently 14.56%), making it much cheaper than MFD.
(*MFD owns mostly equities while MFD owns a combination of equity and fixed income, so this is not a direct apples-to-apples comparison of performance).
The reason for MGU’s cheaper valuation may be because of its lower yield of 7.31% compared to 9.38% for MFD (11.2% before the cut!). However, it is clear that MFD’s higher yield has caused its NAV to erode faster, creating the conditions for a necessary distribution cut. In contrast, MGU’s NAV has been relatively steady over the last 5 years, and it has even raised its distribution twice during this time, compared to two cuts for MFD over the same time frame. Remember CEF investors, don’t just look at the yield!
In fact, we had recommended to our members to swap from MFD to MGU to our members a little over a year ago in “Sell Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund” (public link). Since then, MGU has outperformed MFD by over 15%, which is a fantastic result for a CEF swap. It’s these kinds of suggestions that allow our members to enhance the returns of their portfolios far exceeding the nominal subscription fee for our membership.
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Disclosure: I am/we are long MGU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.