BUI CEF: 5.95% Distribution Yield From A Solid Fund

Written by Nick Ackerman, co-produced by Stanford Chemist

BlackRock Utility&Infrastructure Trust (BUI) has been delivering monthly distributions to shareholders for years now. They originally launched with a quarterly distribution but changed shortly after its inception to a monthly payout. They kept basically the same equivalent payout for shareholders and so going back to 2011, has paid out the same distribution level. It was a small increase of 0.14% due to rounding up.

This fund is frequently trading at a premium over the last ~6 years. Before this, it was at a discount quite regularly. Usually, for closed-end funds, we would want to look for a fund at a discount. However, premiums have become quite the standard trading level in this space. BUI has delivered an even longer track record that makes it a decent buy today.

The Basics

• 1-Year Z-score: -0.51
• Premium: 2.39%
• Distribution Yield: 5.95%
• Expense Ratio: 1.13%
• Leverage: N/A
• Managed Assets: $555 million
• Structure: Perpetual

BUI’s investment objective is to “provide total return through a combination of current income, current gains and long-term capital appreciation.”

To achieve this objective, they have quite a bit of flexibility. They will invest “primarily in equity securities issued by companies that are engaged in the Utilities, Infrastructure, and Power Opportunities business segments anywhere in the world and by utilizing an option writing (selling) strategy in an effort to enhance current gains.”

From their website, they then continue to list every single thing under the sun that is at all related to utilities or infrastructure. Suffice it to say, it is a long description, and they leave almost nothing out, such as “producers of industrial and specialty chemicals” or even “semiconductor and equipment companies (such as solar panel manufacturers.).”

With something such as that, it could make it even ESG tilted. Which is one thing that BlackRock (BLK) has been leaning into and incorporating in their fund information. The MSCI ESG Fund Rating for BUI is AA on a scale of AAA to CCC. The AA puts it in a “leader” category. The MSCI ESG Quality Score comes to 7.7 on a scale of 1 to 10. This makes it a fairly strong ESG-friendly fund as 96.84% of the fund’s underlying holdings are rated. That might not be one’s goal, but with ESG being a big push for investing, it certainly doesn’t hurt having higher marks.

The fund’s expense ratio is rather low, as is typically the case with BLK option-based funds. Instead of utilizing leverage, the fund employs an options strategy to help generate returns. These options will be against single stock positions and are currently running 33.45% overwritten.

The fund has $555 million in total managed assets as of its last update. This is a continually increasing amount over the years due to positive returns that have certainly helped. Positive returns aren’t the only things adding to assets for this fund, though. Due to the premium pricing, the fund has raised a sizeable amount of assets through both a dividend reinvestment plan and an at-the-market offering. As it’s done at a premium to the NAV, this is accretive for shareholders.

Performance – No Leverage Has Provided Benefits

Over the long run, BUI has performed well. With BUI having no leverage, we can see that Cohen & Steers Infrastructure Fund (UTF) has outperformed quite handily. UTF is a leveraged fund. On the other hand, Reaves Utility Income Fund (UTG) has provided similar returns despite it being a leveraged fund. A lot of the returns here came from the last year alone. UTG had deleveraged some of its portfolio and hasn’t had as strong of an underlying portfolio.

So BUI can still provide decent returns, even relative to its leveraged peers. It might not be topping the performance of UTF, which has been on fire over the last year but is still respectable.

On the other hand, during the COVID-induced panic selling, the downside was more limited with BUI. The chart is from February 19th, 2020, to March 23rd, 2020. As it isn’t a leveraged fund, this would be expected. Unfortunately, the fund wasn’t around long enough to go back to the GFC.

In terms of its premium, the fund is fairly valued to undervalued. That would be depending on what historical average you are looking at. The fund is trading below its typical range of 3.7% based on the last one-year average. If you go back further to the last 5 years, it is trading slightly above as it comes in at 2.30%. Even further than that, going back 10 years, we see that it is fairly above that average. Prior to around 2016/17, the fund traded at a relatively deep discount for an extended period of time.

It has been a trend of the last ~6 years where we see it going to these lofty premiums. In fact, it even went into the double-digits for a brief period of time before falling back down. That tends to be my cutoff even for core-type funds – if it gets to a double-digit level, it typically represents a fairly attractive opportunity to sell. For BUI, with a more regular premium over the years, I believe I could hang on and let it ride a bit higher for a bit longer.

A small premium now to pick up shares for a longer-term investor doesn’t seem to be a big ask.

Distribution – Solid Track Record

Nothing is guaranteed in investments, but a solid track record of regular income from this fund is undoubtedly appealing. It could make them think just a bit longer before cutting the distribution during market downturns. Being a closed-end fund, they have the flexibility to payout distributions classified as return of capital over periods to wait for a potential rebound. The fund launched in 2011, so we don’t have the GFC performance here again. However, as we touched on above, the fund hasn’t reduced its distribution since its launch.

This fund will rely on capital gains and net investment income to cover the distribution. However, as I just mentioned return of capital, it is important to realize that there is ROC in this fund’s distribution. Despite how strong the performance from the fund has been over the last several years.

The simple reason is that the fund doesn’t realize enough of its underlying capital gains. This affects the net asset value or NAV per share to rise still while distributions get classified as ROC.

In both of the last two years, ROC has made an appearance. However, it hasn’t been destructive ROC due to a rising NAV.

One other piece you might have noticed about the fund is that they raised $41.5+ million in the last six months through issuances of shares. This was the combined amount raised from the DRIP and the ATM. That was more than enough to cover what the fund was paying out; thus, that also increased the total net asset value for the fund. Since it was done at a premium, it would have had a positive impact on the fund’s NAV per share as well.

BUI’s Portfolio

Portfolio turnover was very light in the first six months of 2021, at a rate of just 7%. In prior years, they’ve been a bit more active. 2020 and 2019 both saw turnover rates of 39%. The fund doesn’t seem to have changed too much from when I covered it earlier this year either.

Geography allocation places the U.S. as the largest portion of its portfolio. This was fairly consistent with the previous 54.20% allocation that was going back to March 31st, 2021. After that, there were even more minor changes, with European countries dominating the rest of the top ten country exposures.

Utilities continue to dominate the fund’s exposure, followed by capital goods/industrial stocks. This isn’t the only utility/infrastructure fund to favor heavier exposure to industrials either. Aberdeen Standard Global Infrastructure Income Fund (ASGI) has its largest exposure to industrial stocks despite the infrastructure focus.

The fund managers must be seeing something in the industrial space. In my opinion, it is a reasonably attractive area to invest in based on it being a value-oriented sector. Value stocks tend to perform better in higher inflation periods. We’ve been seeing some of that play out as the iShares Core S&P U.S. Value ETF (IUSV) has been outperforming iShares Core U.S. Growth ETF (IUSG).

Looking at the fund’s top ten holdings at the end of 2021 is really where we see a lot of similarities from earlier this year.

NextEra Energy (NEE) remains the fund’s largest position. It has only grown its dominance from the second-largest position Enel SPA (OTCPK:ENLAY). ENLAY is a stock that trades OTC and can add additional risks. It’s also a position that represents some of BUI’s international exposure. The company is headquartered in Italy but operates in several countries as a utility company.

Like most utility companies, they are pushing more towards green energy production and away from fossil fuels. Coal-fired generation has been rapidly declining, and they plan to phase out coal use by 2027. Ellsworth Research delved into that topic at more length.

Despite ENLAY being a rather interesting company, it hasn’t translated into price performance from March 31st, 2021, to the end of 2021. That’s the period we are looking at for the performance of the top five stocks below.

We’re using that time frame because that was the last time we looked at the top holdings of BUI in the previous article. Over that time, Johnson Controls International (JCI) had performed the best, with Waste Management (WM) right behind. NEE also put up respectable returns.

This gives us a good look into why some of the portfolio positions have moved the way they did between updates. NEE increased its allocation but started at a significant weighting. JCI was previously a 2.8% weighting but has pushed itself in at the fourth largest position from the seventh due at least partially to its outperformance. That was the same for WM as it went from a 2.75% weighting to a 2.98% holding.

JCI and WM are great examples of some of their industrial stocks. JCI “operates as a diversified technology and multi-industrial company worldwide.” WM’s operations aren’t nearly as exciting as they provide “waste management environmental services to residential, commercial, industrial, and municipal customers in North America.”

Conclusion

BUI has delivered solid results to shareholders over the years. This has pushed the fund to trade at premiums fairly regularly over the last 6 years or so. This has translated into the fund raising assets fairly aggressively through their DRIP and ATM. Since it is done at a premium to NAV, it is accretive for shareholders. At the fund’s current premium, it doesn’t seem overly valued. One could probably start a small initial position and utilize a dollar-cost averaging strategy to make this position larger eventually over time.