Summary
- UTF is an infrastructure-focused CEF with a healthy 7.3% distribution rate paid monthly.
- The CEF's largest position is set for strong long-term growth on the back of the Inflation Reduction Act.
- Whilst its distributions have had to lean on return of capital, this has been relatively rare and only occurred twice over the last 12 months.
Cohen & Steers Infrastructure Fund ( UTF ) forms a solid source of income and should be strongly considered by income investors looking for stability and certainty in 2023. The closed-end fund last declared a monthly cash dividend per share of $0.155 , in line with its prior payout and for a distribution rate that works out to be 7.2% against its current price. The monthly payout has stayed consistently at $0.155 per share since 2018 when it was increased from $0.1340 per share. This has placed the next five years of dividends into view as UTF's equity portfolio of infrastructure companies stares down a period of elevated interest rates and potentially poor economic growth.
But there is a lot to like about the CEF. Firstly, it actually has a healthy allocation to non-US infrastructure companies which form roughly 40% of the CEF. Canada, Australia and the United Kingdom all form the next four largest locations against a portfolio that held 250 positions as of the end of December 31, 2022.
So what exactly are you buying into for a 2.19% expense ratio? You're 5.6% invested in the largest wind and solar energy producer in the world NextEra Energy ( NEE ), around 4% invested in Class I freight railroad Norfolk Southern ( NSC ), and around 3.6% invested in the owner and operator of wireless and broadcast communications infrastructure American Tower ( AMT ). The top ten holdings collectively form 31.3% of the fund which also comes with a healthy level of sector diversification.
Healthy Diversification And Long-Term Growth
Electric utilities are doing the bulk of the heavy lifting at 30% of the fund. This is a sector that would form the bulwark of any fund targeting low-risk dividend growth. Utilities are driven by broadly investor-friendly regulated returns and stand to ride the decade-long growth trend of decarbonization. Indeed, Juno Beach, Florida-based NextEra is looking to extend its position as the largest renewable energy company in the world on the back of the $370 billion Inflation Reduction Act. NextEra's capital investment plan will see it spend $85 billion to $95 billion between 2022 and 2025 to build at least 8 GW of battery storage capacity. The company intends to seize the IRA's tax incentives to increase its generating capacity towards 100 GW from renewable natural gas, solar and both onshore and offshore wind.
The IRA is a remarkable generational piece of legislation that will provide strong opportunities for growth for the electric utilities section of UTF's portfolio. It provides a blend of production tax credits to the growing climate economy. With the average return on equity for US utilities at around 10.13%, a regulated level set by Public Utility Commissions, every capex dollar drives a corresponding return. This has laid the groundwork for dividends over the next few years on the back of the structural shift to lower carbon energy. Hence, even as the US potentially faces down a recession later this year, the longer-term fundamentals of the CEF look healthy.
Whilst the CEF has had to lean on return of capital, this has been rare and has only happened twice over the last 12 distributions. However, total ROC as a per cent of these distributions stands at 11.65%, a not insignificant number. ROC erodes the CEF's future earnings power but is a destructive effect that's less pungent for equity-focused CEFs versus fixed income. As a broad rule, it's better for distributions to come from long-term capital gains and income.
Premium To NAV Against Recession Risks
UTF currently trades at a small premium to NAV, more in line with its 3-year premium of 0.98%, after a short period of macroeconomic risks weighed down on its valuation. The CEF depends on crystallizing long-term capital gains for its distributions. Hence, the common share performance of its underlying positions holds weight in driving the overall direction of the distributions.
These have all staged dramatic rallies since bottoming in October, a period that was defined by still pertinent fears around runway inflation and a Fed that was not backing down from its fight to get the headline figure back to their 2% target rate. The economic figures are now trickling in and it looks likely that the US will stage a soft landing just as the Fed fund rates are set to peak. Economic growth for 2023 is now expected to come in at 1.4% with interest rates likely only experiencing two further 25 basis point hikes this year as inflation continues to collapse on the back of falling energy prices. This has pumped enthusiasm into the stock market, helping pad the base for future distributions. Critically, UTF is a good income pick for a portfolio looking towards stability with an added scope for growth.
For further details see:
UTF: An Infrastructure Backed 7.3% Distribution Rate