Reaves Utility Income Fund: Coming Dilution Will Likely Drive Down NAV And Market Price
Summary Management has recently filed for a rights offering with SEC. The rights offering is an offer to sell more shares, which will lead to further dilution of NAV and the market price of UTG. The current downward spiral of NAV along with rights offering suggests investors would be better served by avoiding UTG. ( click to enl arge) I wrote about Reaves Utility Income Fund (NYSEMKT: UTG ) back in July, suggesting that it offers a relatively safe 6% yield paid monthly. In that article, there was a table that showed that UTG had outperformed both the S&P Utilities Index and the Dow Jones Utility Average over a 5-year period ending 4/30/2015. However the fund has not been performing as well this past year. On that same chart, total return was a -0.17% for six months, whereas the S&P Utilities index returned -1.10% and the Dow Jones Utility Average returned 3.78%. A copy of the table is shown below: (click to enlarge) Source: UTG Semi-annual Report Reuben Gregg Brewer wrote 2 articles on UTG over the past several months that indicate things are not going well at this CEF. You can read these articles here and here on Seeking Alpha. In the first article, he reports that NAV is down 11.5% for the year and that market price is down 13%. He shows some concern in the article that UTG will have to do a ROC (Return of Capital) to maintain the dividend if things don’t turn around soon. UTG has been able to avoid making ROC dividend payments over the past few years. He maintains a positive attitude toward the CEF in this article in spite of the bad news while at the same time predicting a lower price. His last 2 statements in the first article are: ” That said, if you are looking for a bargain, I don’t think UTG is there just yet. But with market volatility kicking up, keep a close eye on UTG, because fickle investors may just give you the opportunity to buy in on the ‘cheap’.” The second article chronicles the rights offering that UTG is about issue to stockholders. On 10/6/2015 UTG announced that it filed with the SEC to offer additional common shares of the fund pursuant to a rights offering. One right per share will be given to each shareholder and 1 share of UTG can be purchased for every 3 rights held. UTG also has the option to issue up to 25% additional shares based on the common shares issued in the rights subscription. Reuben Brewer offered the opinion that this offering would work out for shareholders in the long run. He wrote: “If you are a Reaves shareholder this is probably a good deal for you. Will it be a good deal in the next six months? Maybe, maybe not. But longer term the CEF appears to be of the opinion that now is a good time to put money to work. And that should work out for you if you plan to stick around for some time.” Levis Kochin violently disagreed with Brewer in the comments section by stating that the rights offering is a reach for more management fees by Reaves Asset Management. He asserted further that this offering is stealing NAV from current shareholders by offering shares below NAV. Kochin is correct in that the rights offering is a further dilution of NAV and is not in the best interests of stockholders. To see the rights offering as a positive requires one to have a great deal of faith in the managers of the fund. Mr. Brewer believes management will use these additional funds to purchase shares of beaten down dividend companies and that it will eventually work out to the best interests of shareholders. He believes that history will repeat itself when it worked out well for shareholders the last time UTG did this in 2012. Operations this year has NAV dropping at about 1% a month. The Market price of UTG has dropped faster than NAV. As of 9/30/15 NAV has dropped 9.85% and the market price has dropped 10.93%. The performance table from UTG is shown below: (click to enlarge) Source: Reaves Utility Income Fund Website (performance) Conclusion: I am currently negative on UTG because of the impending dilution coming with the rights offering and the increasing number of available shares. The distribution of more shares will likely cause an imbalance of shares offered to sell as opposed to offers to buy. Both the NAV and market price of UTG will likely be soft for the next 6 to 12 months. Therefore I would definitely not be a buyer at the present time. But if you already own UTG, you may wish to hold on to keep collecting the monthly dividend and to wait out management hoping it will invest the new money wisely. In the accounts of retired folks, I let the investment ride to collect UTG’s monthly dividend. For folks that are not retired, I sold the issue and moved the money to other investments that appear more positive over the next few months.