Icahn Enterprises: The Corporate Raider Throwing Stones From His Own Glass House – Hindenburg
Initial Disclosure: After extensive research, we have taken a short position in units of Icahn Enterprises L.P. (NASDAQ:IEP). This report represents our opinion, and we encourage every reader to do their own due diligence. Please see our full disclaimer at the bottom of the report. Figures current as of market close on April 28, 2023.
Background And Bull Case: Collect A 15.8% Dividend While Investing Alongside Legendary Corporate Raider Carl Icahn
Carl Icahn is an iconic and legendary activist investor with a reputation for taking stakes in companies and then unlocking shareholder value, usually by accusing corporate executives of mismanagement or malfeasance and claiming to act in the interests of regular investors.
“A lot of people die fighting tyranny. The least I can do is vote against it.” – Carl Icahn, Texaco Annual Shareholder Meeting 1988
(Source: Carlicahn.com)
Icahn has used his reputation to fuel Icahn Enterprises, an ~$18 billion market cap NASDAQ-listed investment vehicle offering exposure to Icahn’s personal portfolio, including a mix of public and private companies such as petroleum refiners, auto parts distributors, food packaging companies and real estate. [Pg. 6]
The company began as American Real Estate Partners L.P., a publicly traded master limited partnership formed in 1987. [Pgs. 1-3] In 2007, the name was changed to Icahn Enterprises after it purchased Icahn’s private asset management business for $810 million. [1]
Carl Icahn and his son Brett manage the company and are its largest holders, with 85% of the company. Bulls believe this stake aligns Icahn’s incentives with public investors, as Icahn’s holdings in IEP comprise ~85% of his net worth, based on Forbes data.
Beyond the allure of investing with one of the most well-known names on Wall Street, the other key draw to Icahn Enterprises units has been the company’s consistent $2 per quarter cash dividend, amounting to an annualized yield of about 15.8%, giving IEP the highest dividend yield of any large cap (>$10 billion) company by far, with the next closest being a 9.9% yield, according to FactSet screening.[2]
IEP’s dividend – paid consistently for 71 quarters straight – has been the key allure for IEP’s retail investor base. [Pg. 4] The company has a history of increasing its dividends, with the current dividend of $2.00 per unit per quarter in place since Q1 2019. [Slide 4][3]
Background And Bull Case: Investment Bank Jefferies, The Only Major Sell-Side Firm Covering IEP, Has Consistently Given It A “Buy” Rating and Has Indicated To Retail Investors That The Dividend Is Safe “Into Perpetuity”
Other Retail Investor-Focused Media Outlets Have Also Focused On IEP’s Dividend Yield And Icahn’s Star Status
Jefferies, the only large bank covering IEP, has consistently given it a “buy” rating. It reiterated its “buy” rating in a February 2023 fourth quarter recap report.
To arrive at price targets for its “Base Case”, “Upside Scenario” and “Downside Scenario”, the bank assumed in all cases that IEP’s generous dividend would be paid in perpetuity, giving investors the impression that the yield is extremely safe. [1, 2]
In July 2022, retail investor-focused news outlet Motley Fool wrote that Icahn’s ~16% dividend had “room to grow” and the company was a “rock-solid dividend play”, owing to Icahn’s star status.
A similar October 2022 piece by Motley Fool said that IEP sported “ultra-high dividend yields, fundamentally strong businesses, and a proven ability to generate healthy levels of free cash flows in an uncertain economic environment.”
In an October 2022 article by InvestorPlace, IEP was listed among the three stocks to buy “with your social security increase” because of its 14.8% dividend at the time.
Similar articles have appeared in other retail outlets focused on the safety of the dividend.
Overall, regular investors have been led to believe that IEP’s dividend is safe, despite being abnormally high.
Background: IEP Trades At An Absurd 218% Premium To Its Last Reported Indicative NAV
By Comparison, Most Peers Trade Around Or At A Discount To NAV
Before examining the sustainability of IEP’s dividend, we first compared the company’s valuation to peers on a fundamental basis.
We assessed Icahn Enterprises compared to similar celebrity investor-controlled investment vehicles, such as Dan Loeb’s Third Point and Bill Ackman’s Pershing Square. Third Point and Pershing Square investment vehicles both trade at discounts to NAV, likely due to the investments being closed-end (i.e. investors can’t redeem) and high fees paid to the sponsors.
By comparison, Icahn’s vehicle, similar to other closed-end funds, does not provide redemptions, and while it may charge lower fees than its peers, Icahn’s vehicle trades at about a 218% premium to its December 2022 reported “indicative net asset value”.[4]
Icahn Enterprises (NASDAQ: IEP)
Third Point (LSE: TPOU)
Pershing Square (OTC:PSHZF)
Net Asset Value
$5,643,000,000
~$700,000,000
$10,100,000,000
NAV per Share (Unit)
$15.96
$23.06
$53.88
Price per Share (Unit)
$50.82
$19.83
$34.75
Premium (discount) to NAV per share (Unit)
218%
-14%
-35%
(Source: Company Filings 1, 2, 3, 4)
(Source: Company filings. Dotted line represents Hindenburg calculation of YTD IEP premium/NAV estimate)
Background: We Further Compared Icahn Enterprises To All 526 U.S.-Based Closed-End Funds In Bloomberg’s Database And Found It Trades At A Higher Premium To NAV Than All Of Them
As a further check, we compared IEP’s premium to NAV against all 526 U.S. based closed end funds (CEFs) and their respective premiums to NAV in Bloomberg’s database.
We found that IEP’s premium to NAV is the highest among every fund on the list and more than twice as high as the next closest fund.[5]
(Source: Hindenburg screenshot of Closed End Funds from Bloomberg. IEP manually added by Hindenburg for comparison, as it is a closed investment vehicle structured as an MLP vs. a CEF)
Icahn’s Last Year Of Significant Outperformance Was 2013, Coinciding With The Beginning of His Successful Herbalife Campaign
Icahn’s Investment Portfolio Has Lost 53% Since 2014. This Compares To S 500 Performance of 147% In The Same Period
Despite Icahn’s career of heavily publicized activist wins, his recent performance has suffered. Icahn’s last year of significant outperformance was in 2013, when Icahn’s investment fund returned 30.8%, coinciding with the beginning of his successful Herbalife campaign. [Pgs. 1 and 95]
Since 2014, Icahn’s public market investment portfolio, which comprises 45% of IEP’s gross indicative assets (i.e., excluding holding company cash debt) has lost 53%. In the same period, the S&P returned 147%. [Slide 20]
Icahn’s Dividends Are Mathematically Unsustainable: Since 2014, $1.5 Billion In Cash Dividends Were Paid Despite Negative Free Cash Flow of $4.9 Billion, Owing To Poor Performance
Overall, IEP has posted negative $4.9 billion in free cash flow since 2014, according to FactSet data, fueled by portfolio losses and declines in IEP’s operating investments. [Pg. 46, Pg. 41, Pg. 116]
Despite its extended period of losses and negative cash flow, IEP has paid unitholders cash dividends of almost $1.5 billion during the period. [1,2,3,4,5,6,7,8,9]
During that same time frame, IEP raised its quarterly dividend 3 times, from $1.25/unit in 2013 to $2/unit starting in 2019 (a year when IEP posted negative $1.7 billion in free cash flow.)
In the past 4 years alone, IEP has paid out $980 million in cash dividends, despite cumulatively burning almost $1.6 billion in free cash flow.
The Company Has Supported Its Dividend And Declining Asset Values By Selling $1.7 Billion Through At The Market (ATM) Unit Sales Over The Past 4 Years
The Bookrunner For Unit Sales Is Jefferies, The Sole Sell Side Analyst That Covers IEP, Which Has Assumed In Its Research Notes That IEP’s Dividend Is Safe In Perpetuity
In Short, Icahn Has Been Using Money From New Investors To Pay Out Dividends To Old Investors
With a name as well-known as Icahn, one would think sell side analysts would line up to offer their unique take on publicly traded Icahn Enterprises. Instead, Jefferies is the sole sell side analyst covering the company.
Jefferies analyst Daniel T. Fannon initiated the firm’s research on IEP in April 2013 with a “buy” rating and has touted the company ever since. In Fannon’s February 28, 2023 research note, he placed a $70 price target on Icahn Enterprises, saying:
“IEP represents one of the few public vehicles for investors to access the activist investor style”.
As noted earlier, Jefferies’ research notes assume that Icahn’s dividends will be paid out in perpetuity even in a worst case scenario, despite free cash flow and investment losses that clearly evidence that the dividend is high risk.
To sustain its dividend, IEP has sold units over the last 4 years, totaling over $1.7 billion in at-the-market (ATM) offerings. [Pg. 47, Pg. 98] The sole agent of all of IEP’s offerings has been Jefferies. [1,2,3,4,5]
Once again, the very investment bank selling IEP units to investors is simultaneously drawing in additional retail investors with its “buy” rating and its unsupported assumption that IEP’s dividend is safe forever.[6]
Carl Icahn’s relationship with Jefferies Co (“Jefferies”) goes back to the corporate raider leveraged buy-out days of the 1980’s. Several articles from the time noted Icahn’s ties to the founder of Jefferies, Boyd Jefferies, who eventually pleaded guilty to two felony counts of securities fraud and resigned from the firm he founded.
Jefferies current CEO, Richard Handler, has maintained a close relationship with Carl Icahn over the years. A 2014 article reported that Icahn helped bail out Jefferies during the global financial crisis. Jefferies now appears to be returning the favor (and collecting fees along the way through its ATM unit sales).
Read the full report here by Hindenburg Research.
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