UTG: 6.5% Yield, Monthly Pay Defensive Play (NYSE:UTG)

Yes, the Energy sector has been on fire, with the rise in the price of Crude and Natural Gas over the past several months.

But, surprisingly, a usually stodgy sector has been getting a lot of support from the market also – the Utilities sector. Normally in a rising rate period, you’d expect the Utilities sector to sell off, but that hasn’t been the case.

While the Energy sector is up 27% over the past 6 months, the Utilities sector has also outperformed, rising 14.5%:

With their portfolios getting hit by rising rates, a war, and a looming Fed quantitative easing pullback, many investors have returned to the Utilities sector for safety.

If you’d prefer not to bet on 1 or 2 Utilities stocks, you can get broader coverage via utility funds, such as the Reaves Utility Income Fund (NYSE:UTG), which is a closed-end fund, a CEF.

Profile:

“The Fund’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 a relatively long track record – it IPO’d on 2/24/2004. It has $1.9B in Net Assets, with 41 holdings, and a 1.23% expense ratio, with average daily volume of 235K. Management uses some leverage, which was at 19.14%, as of 4/18/22.

Distributions:

UTG pays a monthly distribution of $.19, with a 5-year distribution growth rate of 3.81%. It has a long history of dividend hikes, having raised its monthly payouts from $.1150 to $.1250 in 2011, with gradual hikes over the past 10 years, including its latest hike in July 2021, from $.18 to $.19. Its last special distribution was $.92 in 2016.

Management pre-announces each quarter’s upcoming monthly dates. UTG went ex-dividend this week, and goes ex-dividend next on 5/18/22, with a 5/31/22 pay date. That’ll be followed by a 6/16/22 ex-dividend date and a 6/30/22 pay date.

At its 4/19/22 closing price of $34.81, UTG yielded 6.55%.

UTG’s distribution coverage came mainly from Realized Gains, 67%, in its most recent fiscal year, ~26% coming from NII, and 93% in Unrealized Gains:

Taxes:

As of 3/31/22, ~68% of UTG’s current fiscal year distributions came from Long Term Capital Gains, with ~32% coming from NII, and 0% from Return of Capital.

Holdings:

As of 12/31/21, UTG held ~82% in US-based stocks, ~14% in foreign stocks, and 3.7% in short term securities:

As of 12/31/22, ~55% of UTG’s portfolio was comprised of Utilities, with Multi/Diversified and Electric Utilities in the top 2 slots. REITs were ~16%, with Diversified Communications Services at 9.6%. Media and Road & Rail were ~7% and 6.7% respectively.

As of 3/31/22, UTG’s top 10 holdings comprised ~35% of its portfolio, with Canadian telecom BCE (BCE) in the top slot, at 4.14%. The other 9 top holdings are all US-based utilities firms, with NextEra Energy (NEE) having by far the biggest market cap, at $162B.

Discount Pricing:

At its 4/19/22 closing price of $34.81, UTG was trading at -1.25% below its 4/18/22 NAV/Share of $34.25. Although it may not seem like much a discount, that -1.25% discount was cheaper than its 1-year average premium of 1.30%, its 3-year average premium of 1.43%, and its 5-year average discount of -0.93%.

Buying CEFs like UTG at a deeper discount than its historical average discounts/premiums can be a useful strategy, due to mean reversion.

Debt:

UTG ended its most recent fiscal year, on 10/31/21, with $450 million in debt, up from $345 million at the end of fiscal 2020, with leverage of 20.85%, vs. 15.78% at 10/31/20.

Performance:

While UTG has outperformed the S&P over the past month, half year, and so far in 2022, it has trailed the broader Utilities sector, as represented by XLU:

We wondered why, and took a look at the performance of its 41 holdings. It seems to be mainly some Communications Services and REITs which were in the red over the past 6 months, in addition to a water utility stock, American States Water (AWR), and a railroad stock, Norfolk Southern (NSC).

Parting Thoughts:

It’s tough to say whether UTG will continue to outperform the market in 2022, particularly with the Fed raising its rate and stopping its QE program. That being said, Utilities do have the ability to apply for rate hikes, which would ease some of that pressure upon their earnings.

One thing to note also is that UTG is just 4.6% below its 52-week high, which was an all-time high for this fund.

All tables by Hidden Dividend Stocks Plus, except where otherwise noted.