Why We Just Purchased TYG, A Deeply Discounted MLP/Midstream CEF

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Note from Stanford Chemist: We purchased TYG in our Tactical Income portfolio on February 24, 2021.

Tortoise Energy Infrastructure Corp. (TYG)  is an MLP/midstream fund that is shifting towards a more renewables focus (see TYG: Shifting To Renewable Focus).

What we can take away from the above is that they want to take renewables and power infrastructure from 15% currently, all the way to 40%. This will reduce their "other midstream" exposure from 37% to 22%. Additionally, to make even further room for renewables, they are going to target less natural gas - from 44% to 34%. Which, is still a significant position nonetheless.

Currently, the top holdings are still mostly in MLP/midstream securities, with mostly blue-chip stocks as the top holdings. So this transition is still ongoing and will take time, it appears.

(Source: Tortoise)

TYG recently announced a distribution increase of +5.0%, from $0.30 to $0.315/quarter. The press released note that the distribution raises were "a product of the share repurchase programs completed in December and reflects the investment team’s positive long-term outlook for the energy infrastructure sector."

The main attraction of TYG its very wide discount of -21.37% (as of February 26), which is on top of a sector that is already highly cheap. TYG is a personal holding for me that I started buying after the crash, as I mentioned several times previously (here, here and here). So buying TYG in the Tactical Income portfolio will further align the portfolio with my own holdings. [As a reminder, I already own each stock in all of our portfolios. However I also own a number of non-portfolio positions, and I am planning a series of articles to share these with our members as well.]

TYG has had a great run recently, appreciating by nearly +50% over the last several months, as it was spurred by vaccine news plus higher oil prices as consumption recovers. 

Data by YCharts

Yet, it should be noted that MLPs still haven't recovered to their pre-COVID levels, as exemplified by the benchmark ALPS Alerian MLP ETF (AMLP).

Moreover, compared to REITs and utilities, the valuation of MLPs is significantly lower as well.

Meanwhile, the spread to US treasury yields remains much higher than historical averages. As the sector recovers and MLP distributions stabilize (i.e.,. no more cuts), yield-hungry investors may return to this sector to seek income. Thus, I remain bullish on this sector.

(Source: Global X MLP Monthly)

Now make no mistake, the Tortoise funds including TYG were definitely caught on the back foot by the COVID/oil war crash due to the higher leverage used by their funds. In fact, TYG, which we identified as one of the top 10 MLP/midstream CEFs most at risk of distribution cuts in a December 2019 analysis, subsequently materially underperformed our three sector picks (FPL, FIF and KMF) in 2020. 

Despite this significant misstep, I still think Tortoise are above-average fund managers in the energy/infrastructure. Their websites are investor-friendly and their strategy and holdings are transparent. Moreover, TYG (as well as NTG) recently announced continuation of their share repurchase programs:

As part of the Board’s desire to continue its ongoing commitment to enhancing shareholder value, the Board reauthorized a share repurchase program effective through February 28, 2022. Under the share repurchase program, each fund may repurchase up to 10% of its outstanding shares in open-market transactions at such times and in such amounts as management reasonably believes may enhance shareholder value.

(Source)

Repurchase programs are sometimes for show ("Look at us, we're doing right by shareholders, leave us alone activists!"), as they confer only a right but not an obligation to repurchase shares. However, TYG actually followed through with its previous repurchase plan and bought back shares up to the maximum of $25 million, which represented about 12% of the total share count. Given that those shares were repurchased at an average discount to NAV of -24.1%, these repurchases were highly accretive to the NAV/share of the fund.

TYG has completed its share repurchases under the publicly announced repurchase plan allowing up to $25.0 million through December 31, 2020. Under the program, TYG repurchased 1,406,336 shares of its common stock at an average price of $17.762 and an average discount to NAV of 24.1%.

(Source)

Our Tactical Income portfolio purchased TYG at $24.64 on February 24

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