Premium Income Corporation: A Contrarian Gem in a Volatile Market

In a world of geopolitical tension, rising interest rates, and sector-specific volatility, defensive income plays are becoming increasingly attractive. Premium Income Corporation (PIC), a Canadian bank-focused fund managed by Mulvihill Capital, offers a compelling opportunity for contrarian investors seeking steady returns amid market turmoil. Despite a reported net asset value (NAV) dip in its 1H 2025 results, PIC's resilient distribution profile, disciplined hedging strategy, and 9.4% yield on Class A shares (PIC.A) make it a standout defensive income vehicle.

Resilience Amid NAV Decline

The Fund's Class A shares reported a NAV of $5.12 as of April 30, 2025, down from $5.50 at the end of 2024. This decline, however, is not a cause for alarm but rather a reflection of the fund's risk management tactics. While PIC's portfolio of Canadian banks (e.g., Bank of Montreal, Royal Bank of Canada) underperformed broader equity markets in early 2025, the fund's covered call strategy and protective put options helped shield investors from deeper losses. Notably, distributions for Class A shareholders remained robust at $0.48 per share annually, yielding 9.4% based on the April NAV.

The Covered Call Play: A Defensive Shield

PIC's strategy relies on writing cash-covered put options to hedge downside risk, particularly during periods of low volatility when call writing becomes less lucrative. In 1H 2025, this approach was critical: while the S&P/TSX Composite rose 4.1%, Canadian bank stocks lagged at 2.3%, with National Bank of Canada (+8.5%) outperforming Bank of Montreal (-1.7%). The put options, covering portions of the portfolio, limited downside exposure without sacrificing upside potential.

The fund's 88.5% allocation to Canadian banks also provides stability. These institutions boast strong capital ratios and consistent dividend growth—key pillars of PIC's income engine. For instance, five of six major Canadian banks raised dividends by 4.3% on average in Q1 2023, a trend that continues to underpin distributions.

Contrast with Michelin: Defensive vs. Industrial Resilience

While PIC focuses on income preservation, industrial giants like Michelin (ML) highlight operating margin resilience in their sector. Michelin's 2024 segment operating margin of 12.4%—despite volume declines and currency headwinds—demonstrates its ability to navigate cyclicality through premium product sales (e.g., 18-inch+ tires) and cost discipline. However, Michelin's exposure to global trade tensions and automotive demand volatility makes it less insulated from macroeconomic shifts.

Why Contrarians Should Buy the Dip in PIC.A

1. Yield Advantage: At 9.4%, PIC.A's yield dwarfs the 8.47% offered by its preferred shares (PIC.PR.A) and outperforms Canadian bank dividends.
2. Disciplined Hedging: Mulvihill's shift from call writing to put options in low-volatility environments underscores its adaptability.
3. Capital Preservation: While the NAV fluctuates, distributions have remained steady, with total Class A payouts reaching $29.65 per share since inception.
4. Sector Diversification: Canadian banks' stable capital structures and low correlation to tech/energy sectors make PIC a hedge against broader market selloffs.

Risks and Considerations

• Bank Sector Sensitivity: Canadian banks could face headwinds if housing markets or consumer debt strains worsen.
• Option Strategy Costs: Put writing requires collateral, which ties up capital and may limit reinvestment opportunities.
• Liquidity: PIC.A's trading volume is lower than major equities, though it remains liquid for retail investors.

Investment Thesis

For contrarians, PIC.A's 9.4% yield and proven hedging discipline make it a prime candidate to buy on dips. While the NAV may fluctuate with equity markets, the fund's focus on Canadian banks' dividends and dynamic options hedging positions it to outperform during corrections. Contrast this with Michelin's industrial exposure: while its margins are strong, they are less insulated from macroeconomic downturns.

Final Call

Buy PIC.A on dips below $5.00, aiming for an entry at a 9.6% yield. Hold through volatility, as Mulvihill's track record of income preservation and risk management suggests this fund is built to weather uncertainty. For those prioritizing income and capital safety in a shaky market, PIC.A is a contrarian's treasure.

As of June 19, 2025.