DPG Has Some OK Exposures But Modest Premium Isn’t Worth It (NYSE:DPG)

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The Duff & Phelps Utility and Infrastructure Fund (NYSE:DPG), best referred to as just DPG, is an interesting snapshot of the utility and infrastructure world in developed markets, something that we have followed and invested in meaningfully these last couple of years. The fund offers a nice income proposition with a yield over 9%, and in terms of exposure, there are some areas that are interesting. However, as is the case with many more mutual style funds, there’s a lot of diversification and not much value-add. We think that especially in utilities, you need to be selective, and there are plenty of exposures that could just be ignored in building your own portfolio. Trading at a modest premium to NAV, we just don’t see any special reason to invest here, unless you are chasing dividends.

A Look at the Smaller Contributors

The DPG portfolio covers mainly utilities, but other sectors as well. The first is airport services, which used to be one of the most attractive infrastructures before COVID struck.

airport services

Airport Services (SEC.gov)

These stocks are not in specific things like FBOs, or other airport based businesses, they are operators of airports, and depend on low vacancy rates on concessioned real estate as well as the activity of air traffic. Investment rates are still low in the industry made evident by Embraer’s (ERJ) unexpected reversal, and this industry while recovering continues to be a weaker point and probably a bigger risk than we like. Flughafen Zuerich (OTCPK:FLGZY), the Zurich airport operator, has actually recovered in price as an example.

civil engineering

Civil Engineering (SEC.gov)

These companies are civil engineering companies dependent on the economics of large project contracts like building highways and airports. While airport construction is surely not on the menu these days, the civil engineering sector continues to be supported by government initiative, although it’s slowing down and the commodity situation is causing demand destruction. An alright but not needlemoving exposure.


Railroads (SEC.gov)

Railroads are exceptionally attractive in an environment that so rewards owners and operators of logistic and freight assets, which are generating income way ahead of fuel costs. However, this is now a premium sector, where yields have been driven to historic lows due to the Buffettian following around the sector.


Telco (SEC.gov)

The Telco exposures are all operators and not owners of telco infrastructure. Among these INWIT, the Italian Telco operator, is somewhat interesting thanks to the fact that it has 10% of its market cap covered by a 10-year tax gratuity. However, INWIT is quite dearly valued, with its yields being driven to historic lows by growing prices much like the rest of these DPG holding.

Larger Contributors

The fund is leveraged with 39% of borrowing on its stock assets, so the remaining 106% out of 139% of the portfolio is in the two big contributing segments. The first is oil & gas infrastructure.

midstread dpg

Mostly Midstream (SEC.gov)

What is key here is that the vast majority of these companies carry no commodity risk, and are in similar markets to stocks like our Rubis (OTCPK:RBSFY). These stock are characterised by stable and non-commodity related economics. The issues around oil prices potentially declining due to the exceptional geopolitical complexity of that commodity, more so than gas, are not things to particularly worry about in relation to these stocks. While some demand destruction might be happening in their end markets as a consequence of commodity prices being so high, their agreements tend to be quite long-term, commodity resistant and are purchase obligations that are hard to get out of. In any case, the situation is not acute enough where we would worry about any strain on those parameters of take or pay contracts, or whatever else these companies might have in their contract mix, although the attractive take or pay mechanism tends to be standard.

However, we disapprove of the fact that DPG is carrying these at pre-COVID levels. While it could be argued that the situation in commodities is creating a more favourable environment for US pipelines in particular, as the pushback against the renewable transition mounts due to inflation, we would much rather see cheaper assets in this segment, especially when we know that Rubis has been trading down since mid 2021 and trades at lower valuations than its US counterparts. Even an asset like Enagas (OTCPK:ENGGY), which earns pipeline economics from its affiliate income which is becoming increasingly substantial, would be preferable over these expensive US players.

The other major exposure is in utilities. On some level we like what we see here. European utilities tended to be undervalued relative to US counterparts despite being much further along in the renewable energy transition, and endowed with assets that command a nice multiple in infrastructure markets.

utilities dpg

Utilities (SEC.gov)

European utilities are strongly represented here. However, we don’t like some of the exposures on an ongoing basis. They might have been nice at some point, but most have grown meaningfully over the last two years, and the appeal of Europe over the US no longer exists. Moreover, their large maintained holdings are not the best on an ongoing basis. National Grid (NG) is not our favourite due to RIIO exposures. Nextera (NEE) has always seemed expensive to us for what it is, undeserving of its US premium relative to equally if not more developed renewable peers in Europe, even like Iberdrola (OTCPK:IBDSF), although they have CNMC exposure on the regulated utility side of the business and RIIO exposure in their British businesses. Enel (OTCPK:ENLAY) is also not exactly our favourite European utility, because it has enough exposure to subsidiaries like Enel Chile (ENIC) and to pretty concentrated regulated utility exposures. While regulated utilities are nice in that their income is defined by tariff regimes, sustained inflation will be a problem for their remuneration, and they may have a harder time building up their regulated asset bases for earnings growth, and may have to swallow taxes and other measures to try reduce burden on consumers. Even EDP (OTCPK:EDPFY), which was a stock we once recommended, suffers from these issues too due to its EDP Brasil exposure. Right now, we most prefer Ørsted (OTCPK:DNNGY) of their utility exposures the most because it’s traded down and has proven its ability to generate value on major developments despite crowding in renewables.


In the end, the European representation was not as well placed as we might have liked. More pureplay elements in generation might have been nicer, with stocks like ERG (OTC:ERGZF) coming to mind. They could have also had some of the TAP gas transimission players like Snam (OTCPK:SNMRF) or Enagas, which are both still nice yielders with an interesting hydrogen angle. Where they do have regulated utilities, they have those with more nasty exposures, although there are usually offsets in utilities. Overall, nothing sticks out, and the segment has traded up substantially already. With it being a public good to a great extent, it is tough for them to capitalise as much on high utility prices as basic materials companies can on high prices of other commodities. With gas even being an input in CCGT generation, which is not uncommon among European exposures including Enel, they are not the most sharp play on the utility environment. Besides Ørsted which sticks out as a utility company with a clear model and a specialisation in developing a certain breed of assets that the market will continue to appreciate, the utility portfolio looks unremarkable.

dpg nav

NAV vs Price (cefconnect.com)

They currently trade at a slight premium to NAV, not even 3%, but we don’t see much reason other than the dividend to take on DPG’s portfolio in particular in the current environment. Most of the companies within its portfolio are diversified anyway, what’s the point in having a diversified portfolio of already diversified companies? More conviction in the selections would have been nice, so all you’re really getting with DPG is a levered portfolio that is not capable of providing strong returns regardless.

dpg returns

DPG Lackluster Returns (cefconnect.com)

All you’re really getting is a 9% yield. Whether it is sustainable or not is not really possible to discuss, because of course a portfolio whose yield is less than 9% cannot sustain a 9% dividend, but there’s no reason to expect that DPG will change its dividend policy dramatically, especially because it appeals to investors. Overall, we think investors could do a lot better with fewer picks, and that DPG is more a literature review than anything.

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