![]() ![]() Sometimes that means a delay between utility companies eating higher costs while waiting for an increase to kick in. There is a process that they take to request increased rates. Regulated utility companies cannot simply pass all rising costs onto consumers right away. Inflation can work against the utility sector in two ways, both of which I believe have been keeping utilities down.įirst of all, higher inflation can put earnings pressure on the sector. The primary reason for this is inflation, which causes two potential headwinds for the utility sector.Īs we can see, utilities are currently the second-worst performing sector - though in an otherwise terrific year with all sectors green overall. It has mainly been the laggard as we go through 2021. I believe that one area of the market that is showing some value is the utility sector. Often we look at the interest expense without the leverage expense simply because that leverage should be increasing the benefit for investors (i.e., the idea is it is paying for itself.) Performance - Buy Utilities When including interest expenses, this climbs to 1.59%. Though, it certainly wouldn't hurt if it was a bit less due to the significant size of the fund. This isn't overly expensive if we look at other CEF expenses. However, for now, it has been a considerable benefit of incredibly cheap debt of just an average rate of 0.93% for the period ended April 30th, 2021. Due to this floating rate, that could result in higher interest rates when the Fed begins rate hikes next year. They are currently charged a rate of 1-month LIBOR plus a spread of 0.80%. Still, at this time, this is a relatively modest amount of leverage. In hindsight, that wasn't the right move, which has meant a somewhat more muted return for this fund. However, last year they had deleveraged to minimize the risk to their portfolio through the COVID pandemic. This was an increase from the end of fiscal 2020. Around $395 million of this s leverage through borrowings. UTG is a sizeable fund with $2.491 billion in total managed assets as of September 30th, 2021. This can be positive as equities generally provide greater returns for the risks taken over the longer term. UTG's strategy is 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." While they leave the door open for greater diversification across asset types, they primarily and consistently focus on equities. Earlier this year marked the 12th increase going back to early 2004. UTG has even boosted its monthly distribution several times. That's quite a feat considering that CEFs launched previous to those years now have two black swan events under their belt. For closed-end funds, the primary returns are going to be derived from those distributions that they payout.įor UTG specifically, they are one of only a handful of CEFs that have never cut their distribution, while at the same time having inception previous to 2008/09's financial crisis. They've done this via a steady distribution and even some appreciation. Reaves Utility Income Fund ( NYSE: UTG) has been delivering consistent returns for shareholders since its inception. ![]() ![]() Written by Nick Ackerman, co-produced by Stanford Chemist ![]()
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