This article delves deeper into these issues and explores their implications for Icahn Enterprises (IEP) and its investors.
Icahn Enterprises (IEP), a US-based publicly traded holding company run by billionaire investor Carl Icahn, has been trading at a premium of 218% compared to its last reported net asset value (NAV), according to research by Hindenburg Research. The report highlights three primary reasons why IEP units are inflated by over 75%: its premium to NAV, inflated valuations for less liquid and private assets, and poor performance year-to-date following its last disclosure.
Premium to NAV and Dividend Yield
Most closed-end holding companies trade around or at a discount to their NAVs. In comparison, IEP’s premium to NAV is considerably higher than all other comparable entities, and its current dividend yield is ~15.8%, making it the highest dividend yield of any U.S. large-cap company by far, with the next closest at ~9.9%. The report attributes IEP’s extreme premium to NAV to the fact that average investors are attracted to the company’s large dividend yield and the prospect of investing alongside Wall Street legend Carl Icahn.
Inflated Valuations and Poor Performance
The report by Hindenburg Research has discovered concrete evidence of inflated valuation marks for IEP’s less liquid and private assets. The company has marked the value of its public company equity holdings 204% above the prevailing public market price. IEP also owns 90% of a publicly traded meat packaging business that it valued at $243 million at year-end, while the company had a market value of only $89 million at the time. In another instance, IEP marked its “Automotive Parts” division at $381 million in December 2022, and its key subsidiary declared bankruptcy a month later.
Despite its negative financial performance, IEP has raised its dividend 3 times since 2014, with the most recent dividend increase coming in 2019. IEP’s investment portfolio has lost ~53% since 2014, and the company’s free cash flow figures show IEP has cumulatively burned ~$4.9 billion over the same period. Given that the investment and operating performance of IEP has burned billions in capital, the company has been forced to support its dividend using regular open market sales of IEP units through at-the-market (ATM) offerings, totaling $1.7 billion since 2019.
Implications for IEP and Its Investors
IEP is highly levered, with $5.3 billion in Holdco debt and maturities of $1.1 billion, $1.36 billion, and $1.35 billion due in 2024, 2025, and 2026, respectively. IEP’s debt covenants limit the company’s financial flexibility, and it is not permitted to incur additional indebtedness and is only allowed to refinance old debt. With interest rates having increased, IEP will need to pay significantly higher interest expenses on future refinancings.
Carl Icahn’s ownership in IEP comprises about 85% of his overall net worth, according to Forbes, giving him limited room to maneuver with his own outside capital. Further underscoring Icahn’s limited financial flexibility. He has pledged 181.4 million units, ~60% of his IEP holdings, for personal margin loans. The report predicts that IEP will eventually cut or eliminate its dividend entirely, barring a miracle turnaround in investment performance.
Key Findings
- Icahn Enterprises has made the classic mistake of taking on too much leverage in the face of sustained losses, a combination that rarely ends well. The inflated valuation of its assets and unsustainable dividend, coupled with its poor financial performance and limited financial flexibility, paint a bleak picture for the future of IEP and its investors.
- Jefferies, the only large investment bank with research coverage on IEP, has been continuously placing a “buy” rating on IEP units, while also selling billions in IEP units through its investment banking arm to support the very same dividend. This highlights a conflict of interest and a potential lack of transparency in the investment research industry.
Investors in IEP should carefully evaluate the risks associated with the company’s financial structure and performance, as well as the sustainability of its dividend. While the prospect of investing alongside a Wall Street legend may be attractive, it is important to consider the underlying fundamentals and potential risks of the investment.
Note: Investors should conduct their due diligence and seek the advice of a financial professional before making any investment decisions.
