Reaves Utility Income Fund - Solid 5.7% Dividend Payer

Aug.26.14 | About: Reaves Utility (UTG)

Summary

History of consistently raising the monthly dividend.

Trading at the low end of NAV discount history.

Strong NAV growth, but volatile price history creates trading opportunities.

Managed since inception by the same team.

Last week I published my list of Conservative Income-Producing CEFs. Reaves Utility Income Fund (NYSEMKT:UTG) was the pick from the Utility Sector. The Fund has a history of strong NAV growth, trades below its historical NAV discount and pays a solid 5.7% dividend.

UTG Chart

UTG data by YCharts

Description

Reaves Utility Income Fund is a 10 year-old, $800 million Closed-End Fund that invests at least 80% of its assets in the Utility Sector. The Fund utilizes leverage, which currently stands at 24.3% and accounts for 50 basis points of its 171 bp expense ratio. The fund's average daily volume is 70,000 shares or $2.0MM, which should be liquid enough for most individual investors.

Management

The Fund has been managed since inception by Ronald Sorenson (Chairman, CEO, CIO of Reaves Asset Management) and William Ferer (President, Director of Research). Given the senior level of the Managers within the management company, continuity should not be an issue. Management ownership is minimal with Mr. Sorenson owning 0.03% (9,678 shares) of the Fund. (Source: InsiderInsight.com)

Dividend

UTG currently pays a monthly 13.75 cps dividend. This is up 4.8% from it 2013 payout and 10.0% from 2012. An examination of the Semi-Annual Report for the six months ended April 30, 2014 reveals that the Fund generated $37.7MM of net investment income and paid out $23.6MM, and for the eighteen months, generated $70.8MM and paid out $79.3MM (including realized gains). They have not returned any capital over the past 5 years.

Portfolio

The Fund invests primarily in US-based Giant- and Large-Cap stocks. The average market capitalization is $26.6B. 60.6% of its investments are in Utilities, 21.4% in Communications Services and 10.5% in Energy. The three largest holding are Verizon, NextEra Energy and Union Pacific.

Over the last 5 years, UTG's monthly NAV growth has been 1.45% or 18.92% annualized. However, performance has been volatile, with a standard deviation of 4.23%. The highest one-month gain was 11.28% in July 2010 and the lowest was -8.85% in May 2010.

UTG NAV Growth History
1mo 3mo YTD 1yr 3yr 5yr Avg
+0.5% +4.8% +17.7% +26.3% +18.6% +22.1%

+18.9%

Click to enlarge

Source: Morningstar.com

Premium/Discount to NAV History

UTG's current discount of 7.7% is 1.4 standard deviations below its 5-year average of +0.1%. This premium collapse is similar to what has been observed in other Utility CEFs such as UTF and DNP. A reversion to the mean could result in an additional 8.4% in price appreciation.

UTG Average Premium/Discount History
6mo 1yr 3yr 5yr Avg
-5.5% -6.5% -1.0% +0.0% +0.1%
Click to enlarge

Source: CEFConnect.com

Alternative CEF Investments

The two utility CEFs that are similar to UTG are Duff and Phelps Select Income (NYSE:DNP) and Cohen & Steers Infrastructure (NYSE:UTF). UTG has the lowest yield amongst the three, but it does not return capital, while the other two do. NAV growth is almost equal to UTF. Its discount is in the middle. Aggressive investors may want to reach for yield and potential premium expansion by buying DNP. However, UTG is the more conservative, steady grower as it does not have to issue additional capital to fund their dividend as DNP does.

Utility CEFs
Fund Yield ROC% NAV growth Prem/Disc
UTG 5.7% 0% +18.9% - 7.7%
DNP 7.5% 37% +18.0% + 1.9%
UTF 6.1% 42% +19.0% - 11.6%
Click to enlarge

Source: Morningstar.com

Conclusion

Reaves Utility Income Fund is a solid dividend payer that also offers capital appreciation. Its substantial discount to its historical premium/discount to NAV could offer an additional source of alpha.

Disclosure: The author is long DNP, UTG.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.