GUT: Examining The Fund's Changes Over The Past Few Months

seekingalpha08-10

Gabelli Utility Trust is a closed-end fund offering high income with equity exposure, focusing on the utility sector for inflation protection.The GUT closed-end fund yields 9.95%, outperforming peer ...

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href=https://seekingalpha.com/article/4712924-gut-examining-the-fund-changes-over-the-past-few-months><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Gabelli Utility Trust is a closed-end fund offering high income with equity exposure, focusing on the utility sector for inflation protection.The GUT closed-end fund yields 9.95%, outperforming peer ...</p>\n\n<a href=\"https://seekingalpha.com/article/4712924-gut-examining-the-fund-changes-over-the-past-few-months\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"IDU","symbol_name":"iShares U.S. Utilities 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Energy"},"translate_title":"GUT：检查基金过去几个月的变化","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"XEL":1,"NDP":1,"NEE":1,"NFG":1,"OGE":1,"OKE":1,"SWX":1,"UTG":1,"IDU":1,"EVRG":1,"WEC":1,"BUI":1,"DPG":1,"DUK":1,"ES":1,"GUT":1,"US30Y.BOND":0.9,"US10Y.BOND":0.9,"US12M.BOND":0.9,"US2Y.BOND":0.9,"US3Y.BOND":0.9,"US5Y.BOND":0.9,"US6M.BOND":0.9,"US7Y.BOND":0.9,"US912797GK78.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GW17.BOND":0.6,"US912797HE00.BOND":0.6},"content_text":"Gabelli Utility Trust is a closed-end fund offering high income with equity exposure, focusing on the utility sector for inflation protection.The GUT closed-end fund yields 9.95%, outperforming peer funds, but distribution history shows flat payouts for over a decade, disappointing as an inflation hedge.The fund appears to have purchased some utility common stocks during the first quarter that should have appreciated in price.The fund has managed to cover its distribution so far this year, but it is difficult to see how it will do this over most periods.The fund is trading at an enormous premium to net asset value.   pedrosala The Gabelli Utility Trust (NYSE:GUT) is a closed-end fund, or CEF, that can be employed by investors who are seeking to earn a high level of income from the assets in their portfolios while still retaining their equity exposure. In a recent article, I explained why income investors may be better off with equity funds rather than fixed-income funds going forward: One of the nice things about this fund is that it invests in equity securities, so it provides a certain amount of protection against inflation, which may be a bigger problem going forward than it has been in the past. After all, the projections for large fiscal deficits going forward are well-known, and it is difficult to see any way for these deficits to be funded by any method apart from the creation of new currency. Historically, equities, real estate, and gold have been the best ways to preserve the purchasing power of your money against inflation. Unlike some equity funds, though, the Gabelli Utility Trust invests solely in the utility sector. While utilities do have a tendency to deliver somewhat underwhelming performance when compared to equities in some other sectors, they do still help investors preserve the purchasing power of their wealth. After all, as anyone who has paid an electric or gas bill in the past few years can attest, the cost of these things has been going up rapidly recently in some parts of the country. For example, as OilPrice.com points out:  The report found that over the last few years, California’s electric bills are generally rising due to higher electricity use from things such as air conditioning, and higher overall electricity prices. Since January 2014, residential average rates for the PG&E service area have jumped by 110%, those of SCE have surged by 90%, and SDG&E rates have surged by 82%.  While not all the increase in costs has gone to boost the bottom line of that particular state’s utilities, there is a correlation between electric bills and utility net income. Thus, the utility company equities held by the Gabelli Utility Trust should be able to offer a certain amount of protection against inflation. The Gabelli Utility Trust does not skimp on income, as some other equity closed-end funds do. As of the time of writing, shares of this fund yield 9.95%. This is fairly impressive when compared to peer funds:   Fund Name Morningstar Classification Current Yield   Gabelli Utility Trust Equity-Sector Equity 9.95%   BlackRock Utilities, Infrastructure, & Power Opportunities Trust (BUI) Equity-Sector Equity 6.44%   Duff & Phelps Utility and Infrastructure Fund (DPG) Equity-Sector Equity 8.05%   Reaves Utility Income Fund (UTG) Equity-Sector Equity 8.03%   Tortoise Energy Infrastructure Fund (NDP) Equity-Sector Equity 6.77%   Click to enlarge As we can see, the Gabelli Utility Trust has a substantially higher yield than most other closed-end funds that invest in the utility sector. This is something that might appeal to income investors who are seeking to maximize their incomes. However, it comes with a risk because any time that the market assigns an outsized yield to a fund, it is expected to be unable to maintain its distribution. Indeed, as I pointed out in my previous article on this fund, that is a very real concern here, as this fund’s distributions have frequently resulted in the destruction of net asset value. We will want to see if this is still the case today. The last time that we discussed this fund was on May 7, 2024, so about three months have passed. The market has generally been pretty strong since that time, the last few days notwithstanding. In this case, unlike what we have seen in some previous market rallies, the utility sector has not been left out. As such, we might expect the shares of the Gabelli Utility Trust to have performed fairly well since that previous article was published. However, this assumption is inaccurate, as the shares of the Gabelli Utility Trust have only appreciated by 1.69% since the prior article’s publication date:    Seeking Alpha We can immediately see that this fund underperformed both the S&P 500 Index (SP500) and the U.S. Utilities Index (IDU). It is, admittedly, not surprising to see a utility fund underperform the entire large-cap stock index (that is usually the case). However, in this case, domestic utilities actually outperformed both this fund and the entire large-cap stock index in general. That is a rare occurrence, but it does reinforce my point about utilities actually doing fairly well lately. That actually makes the performance of this fund look rather terrible by comparison. However, the stock price alone is not always the best way to measure the performance of a closed-end fund. As I explained in my previous article on this fund: A simple look at a closed-end fund’s price performance does not necessarily provide an accurate picture of how investors in the fund did during a given period. This is because these funds tend to pay out all of their net investment profits to the shareholders, rather than relying on the capital appreciation of their share price to provide a return. This is the reason why the yields of these funds tend to be much higher than the yield of index funds or most other market assets. When we include the distributions that were paid out by the three assets shown in the performance chart above, we get the following alternative chart:    Seeking Alpha This chart shows investors in the Gabelli Utility Trust realizing a 4.21% total return since our May 7 discussion. That is actually quite a bit better than the S&P 500 Index delivered over the period, although it is still not as good as the U.S. Utility Index managed to provide. This does make the fund look somewhat better, though, especially since many investors who would purchase a fund like this are more interested in the yield than an average investor. As three months have passed since we last discussed the Gabelli Utility Trust, there have been some changes. Let us take a look at them now and see if we need to update our thesis. About The Fund According to the fund’s website, the Gabelli Utility Trust has the primary objective of providing its investors with long-term growth of capital and income. This actually makes a lot of sense given the fund’s strategy, which is clearly explained on the website: The Gabelli Utility Trust is a closed-end, diversified management investment company whose primary objective is long-term growth of capital and income. Investments will be made primarily in foreign and domestic companies involved in providing products, services, or equipment for the generation or distribution of electricity, gas, water, and telecommunications services. The Fund pays a monthly dividend. As the introduction states, this fund invests almost exclusively in common equity securities, even though the description on the website above does not explicitly state that. The first-quarter 2024 holdings report provides the following asset allocation as of March 31, 2024:   Asset Type % of Total Assets   Common Stocks 92.2%   Warrants 0.0%   U.S. Government Obligations 7.8%   Click to enlarge The “U.S. Government Obligations” consist entirely of short-term U.S. Treasury bills:   Fund Q1 2024 Holdings Report Thus, this fund appears to be following the example of some other Gabelli funds and simply putting its idle cash into short-term U.S. Treasury bills instead of a money market fund. As I explained in a recent article: Thus, it appears that the fund is using these securities as an alternative to a money market fund to hold its cash that would otherwise be sitting idle. We can think of it almost as though the fund is simply running its own in-house cash management fund, as opposed to farming it out to another firm. This is not necessarily a bad thing, since the yields on these U.S. Treasury bills are higher than the yields on most money market funds and the fund does not have its returns reduced by the expenses inherent in any money market fund. Thus, the fund is probably earning a higher level of income doing it this way than storing its cash in a money market fund. However, it arguably reduces its liquidity slightly because it does not have the benefit of hundreds, if not thousands, of other investors putting money in and out of its cash positions. This is probably not a big deal, especially since the maturities on these bills are so short, but it is something to consider. The remainder of the company’s portfolio is invested in common stocks, as the chart above shows. These are almost entirely utility and telecommunications companies, as the website suggests:   Industry % of Total Assets   Energy & Utilities 78.6%   Communications 10.4%   Other 3.2%   Click to enlarge (Figures as of March 31, 2024.) Thus, it looks like this fund is doing exactly what it claims to do. That works very well with its objective, since utility companies generally aim to grow their dividends annually while delivering slow and steady net income growth. Thus, if their price-to-earnings ratios remain steady, the stock should appreciate over time with net income growth. Regular readers likely know this from reading some articles on specific utility companies that I have published here on Seeking Alpha over the years. The steady increase in the utility companies’ stock prices from the net income growth provides the long-term capital appreciation that the fund’s objective refers to. The dividend growth of a typical utility fund should allow the fund to grow its income annually. Thus, the objective seems to check out. The largest positions in the fund’s portfolio do have a pretty good history of dividend growth. Here are the largest positions in the fund's portfolio as of June 28, 2024:   Gabelli Funds Let us take a look at the five-year dividend growth rate for each of these companies:   Company Name 5-Yr. Dividend Growth Rate   NextEra Energy (NEE) 10.74%   ONEOK (OKE) 2.49%   WEC Energy Group (WEC) 7.17%   Southwest Gas Holdings (SWX) 3.33%   Xcel Energy (XEL) 6.34%   Evergy (EVRG) 6.15%   Duke Energy (DUK) 2.02%   Eversource Energy (ES) 5.97%   OGE Energy (OGE) 8.84%   National Fuel Gas Co. (NFG) 3.18%   Click to enlarge Unfortunately, we do see that there are a few companies listed here that have had relatively meager dividend growth over the past few years. In particular, ONEOK, Southwest Gas Holding, Duke Energy, and National Fuel Gas Co. all leave something to be desired with their dividend growth. However, all of these companies have still managed to deliver dividend increases over the period, which is better than some companies have managed to deliver over the same period. For example, some real estate investment trusts have cut their dividends over the past two years. A rising dividend is precisely the kind of thing that we want to see as a defense against inflation, so the growth history of the largest holdings in this fund’s portfolio works well with our overall thesis. The distribution history of the Gabelli Utility Trust is rather disappointing, though. The fund has basically kept its distribution flat for more than a decade:   CEF Connect This compares rather poorly with other funds, such as the Reaves Utility Income Fund, that have grown their distributions over time. This fund’s stable distribution also runs against the objective of providing its investors with a growing level of current income. However, what is perhaps most disappointing is that this fund invests in assets that have grown their dividends over time. This should have provided the fund itself with a steadily rising level of income that can be used to give distribution increases to the shareholders. It has clearly failed to do that. This also somewhat weakens our thesis of using this fund as a way of protecting ourselves against inflation, as the fund’s stable distribution will buy less and less each year. Admittedly, investors in the fund can get a growing income over time by reinvesting the distributions that are received into more shares of the fund. That reduces the amount of money that can be spent today, though, so it is an imperfect solution. Overall, the Reaves Utility Income Fund does much better here. Changes To The Portfolio As three months have passed since our last discussion of this fund, quite a few things have changed in its portfolio. After all, the most recent report that we had available at the time of our previous discussion was dated December 31, 2023. As of today, the latest report is dated March 31, 2024, so we have information about the fund’s portfolio changes that took place during the first quarter of 2024. One of the significant changes that we notice is that the fund’s allocation to utilities and “other” industries increased substantially, while its cash-equivalent U.S. Treasury bill position went down:   Asset Type % of Total Assets Today % of Total Assets Previously % Change   Energy & Utilities 78.6% 75.1% +3.5%   Communications 10.4% 10.8% -0.4%   Other 3.2% 2.9% +0.3%   U.S. Government Obligations 7.8% 10.9% -3.1%   Click to enlarge We can see that the increase in utility common stocks was almost completely offset by a reduction in the fund’s U.S. Treasury bill holdings. It does not appear that this was simply due to stock price appreciation, either. On December 31, 2024, the Gabelli Utility Trust was holding U.S. Treasury bills valued at $31,643,294. As of March 31, 2024, the fund only had $22,513,215 worth of U.S. Treasury bills. These are short-term U.S. Treasuries, so they do not move in price sufficiently to explain an approximately $9.1 million reduction. The only way to explain this is that the fund either sold off some of its U.S. Treasury bills to buy common stocks, or it allowed them to mature and then used the proceeds to purchase common stocks. In either case, it clearly appears that the fund’s management was trying to capitalize on the appreciation that common stocks were delivering during that time. From December 29, 2023, until March 31, 2024, the U.S. Utilities Index appreciated by 5.74%:   Seeking Alpha It has appreciated another 11.35% from March 31, 2024, until today:   Seeking Alpha That is substantially higher than the fund could have possibly earned by sitting in U.S. Treasury bills. Thus, we can conclude that the fund is probably sitting on some fairly significant capital gains right now, depending on when it made its purchase of utility stocks. The timing of this trade certainly reflects pretty well on the fund’s management, too. The last time that we discussed the Gabelli Utility Trust, we saw that it had a remarkably low 2% annual turnover. As such, we can probably expect that there would not be significant changes to the fund’s largest positions list. Indeed, that is the case, as the weightings have changed slightly, but all ten of the companies are the same as they were a few months ago. Thus, there does not appear to be anything that we need to update on here. Distribution Analysis The last time that we discussed the Gabelli Utility Trust, we saw that it failed to cover its distribution over the course of the full-year 2023 period. As of the time of writing, the most recent financial report that actually provides information about the fund’s portfolio is still the annual report that ended on December 31, 2023. As such, there is no real sense in repeating the previous analysis. However, we do want to see if the fund has managed to resolve its previous problem with net asset value destruction and determine if the distribution coverage has improved. Here is the fund’s net asset value since the start of this year:   Barchart This is promising. As we can see, the fund’s net asset value per share has increased by 1.02% since December 29, 2023 (the final trading date of the previous fiscal year). This tells us that the fund has managed to cover all the money completely that it has paid out since the start of the year, solely through the performance of its portfolio. However, this was certainly not enough to offset the net asset value destruction from last year and overall the fund’s net asset value is still down 18.63% since the start of January 2023:   Barchart This overall could be concerning for the distribution. It is technically sustainable as long as the utility sector continues to perform as well as it has since the start of this year, but that is unlikely. It is more likely that the sector will return to its usual historic performance. Over the 2017 to 2023 period, the S&P 500 Utilities sector delivered a total return of 7.89% annually on average:   YCharts The fund’s yield on net asset value right now is 20.20%. It is very difficult to believe that the fund can sustain such a yield when the utility sector does not typically deliver a sufficient total return to match that. Thus, the long-term future of this fund could very much be in doubt here. Valuation Shares of the Gabelli Utility Trust are currently trading at a massive 104.04% premium to net asset value. This is in line with the 104% premium that the shares have averaged over the past month, but this is an enormous price to pay for any fund. Conclusion In conclusion, the Gabelli Utility Trust has made some positive changes to its portfolio over the past few months. In particular, it purchased some utility stocks that have almost certainly made some capital gains. It also managed to cover its distribution year-to-date, which is a very nice change from fiscal year 2023. However, it is difficult to see how Gabelli Utility Trust will be able to sustain its distribution long-term, since the utility sector does not deliver a sufficient total return during most years to cover the amount that it pays out. The valuation also continues to be extremely high.  Editor's Note: This article covers one or more microcap stocks. 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