MFD - UTG: 9% Yielding Utilities CEF And High Yield Alternatives Like UTF

2023-09-24 09:15:00 ET

Summary

• Utilities sector underperforms in 2023 due to rising rates and wildfire liabilities.
• Reaves Utility Income Trust has outperformed over the past 10 years and has a deep discount to NAV.
• Reaves has a lower yield but the highest 5-year dividend growth rate among comparable funds.

In 2022, a down year, the defensive Utilities sector was the 2nd best performer, behind the surging Energy sector. With the S&P 500 (SP500) up over 13% so far in 2023, Utilities are last in performance, at -8.5%. Rising rates have been the main culprit, even though utility companies are able to file for rate increases. Wildfire liabilities have also weighed upon this sector.

Fund Profiles:

The Reaves Utility Income Trust ( UTG ), is a closed-end fund, or CEF. UTF's objective is to provide a high level of after-tax total return consisting primarily of tax-advantaged dividend income and capital appreciation. It intends to invest at least 80% of its total assets in dividend-paying common and preferred stocks and debt instruments of companies within the utility industry. The remaining 20% of its assets may be invested in other securities including stocks, money market instruments and debt instruments, as well as certain derivative instruments in the utility industry or other industries. (UTG site)

UTG has 44 holdings, with a net asset value of $1.98B, and an annual expense ratio of 1.42%. Management uses 20.81% leverage.

This article compares UTG to other CEFs with a large % of Utilities holdings:

-BlackRock Utilities, Infrastructure & Power Opportunities Trust ( BUI )

-Duff & Phelps Utility and Infrastructure Fund Inc ( DPG )

-Gabelli Global Utility & Income Trust ( GLU )

-Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income ( MFD )

- Cohen & Steers Infrastructure Fund ( UTF )

UTG holds 77% in Utilities, second only to DPG, with 87%. BUI holds 49%, trailed by UTF, at 39%, MFD, at 38%, and GLU, at 33%.

While UTG has one of the lower yields, ~8.7%, it has the highest 5-year dividend growth rate, 3.5%. The other 2 funds with positive dividend growth are UTF, at 1.22%, and DPG, nearly flat, at 0.29%.

MFD has the highest dividend yield, at 10.94%, followed by DPG, at 9.34%; GLU, at 9.29%; UTF, 9.05%; UTG, 8.7%; and BUI, at 7.10%.

UTG pays monthly, as do BUI, GLU, and UTF; whereas DPG and MFD pay quarterly.

Dividends:

At its 9/22/23 price of $25.98, UTG yielded 8.78%. It should go ex-dividend next on ~10/23/23, with a ~10/31/23 pay date.

Since its 2004 inception, UTG has distributed over $1.2B to shareholders.

Taxes:

Of UTG's 10 monthly distributions so far for the fiscal year ending 10/31/23, 71.8% have come from long-term capital gains, 26.5% have come from NII, and 1.7% have come from short-term capital gains:

Holdings:

UTG's top 10 holdings comprise 42.5% of its portfolio. In addition to the 77% it holds in Utilities, it also holds 23% in Communication Services - Comcast ( CMCSA ), Deutsche Telekom, and BCE ( BCE ) represent ~13% of the portfolio.

Performance:

UTG is in the ~middle of the group for performance over the past year and so far in 2023, with negative figures trailing the S&P 500 by wide margins. It has eked out a small gain over the past month, vs. negative figures for these other funds and for the S&P. It sits at ~6.6% above its 52-week low.

UTG's best performance years vs. the Morningstar US CEF Sector Equity category were in 2015 - 2016 and 2018 -2019. However, it had negative performance in 2015, 2018, 2019, 2022, and so far in 2023:

Over the past 10 years, BUI and UTF have outperformed UTG on a total return basis by ~12%. BUI, UTF, and UTG have all outperformed GLU, DPG, and MFD by at least 40% over the past 10 years:

UTG has an annualized Market Price return since its 2004 inception of 8.82% and an annualized NAV return since inception of 9.05%.

Valuations:

CEFs' daily valuations are calculated at the end of each trading day. Buying CEFs at deeper than historic discounts to NAV can be a useful strategy, due to mean reversion.

Of the top 3 long-term performers, BUI, UTF, and UTG, UTF are selling at the most discounted price to NAV, at -7.11%, vs. its 1-, 3-, and 5-year NAV prices of -1.24%, 1.61%, and 0.81%.

BUI's -3.4% price to NAV also compares favorably to its 1-, 3-, and 5-year averages of -2%, 0.77%, and 1.96%.

UTG's small 0.12% premium over NAV on 9/21/23 is a bit lower than its 1-, 3-, and 5-year premiums.

Parting Thoughts:

UTF has outperformed UTG over the past 10 years on a total return basis and is also trading at a much deeper discounted price to NAV than its historical averages. It's at its 52-week low and looks oversold on its slow stochastic chart.

UTF has benefited from much more diversification - it has 11% in Midstream energy assets, and 13% in Corporate Bonds, for example.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.

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