Is Icahn Enterprises stock a buy?

Icahn Enterprises (IEP 0.61%) is the holding company of renowned activist investor Carl Icahn, who has a long track record of successfully identifying undervalued companies and actively using his influence to increase their value.

Investors may be attracted to the stock because of its hefty dividend payments. Over the last 12 months, the company paid dividends of $4 per share, giving it a dividend yield of 23.7%. If you’re considering acquiring Icahn Enterprises for its high dividend, you should consider a few things first.

Carl Icahn is a legendary investor.

Carl Icahn considers himself a value investor, but he takes a much more active role in influencing the companies he invests in. His job is to find underperforming and undervalued companies, take large stakes in them, and reorganize their management teams. The company’s strategy to provide more value to shareholders.

In the 1980s, Icahn gained a reputation as a “corporate raider” after conducting a hostile takeover of Trans World Airlines and profiting from asset sales. Recently, Icahn acquired a stake. ebay The company was spun off in 2014. paypalIt happened a year later.

Icahn is an investment legend, but his approach is not something the average investor can achieve. Icahn considers himself a value investor, but his approach to management is completely opposite to that of another legendary investor. Berkshire Hathaway CEO Warren Buffett.

Buffett takes a hands-off approach to the companies he buys stock because he invests in management he trusts. As a result, Buffett tends to hold stocks for much longer, while Icahn tends to hold stocks for only two years.

Icahn’s investment performance in recent years has been disappointing.

Investors may find Icahn’s approach attractive and want to access it through Icahn Enterprises. But the past few years have been difficult for Icahn Enterprises’ investment division. Over the past five years, the company has experienced a net loss of $6.1 billion from continuing operations between its investments and holding company results. This includes interest income, gains and losses on stocks and other investments.

Chart by author.

One of the reasons for Icahn’s poor investment performance was his short selling activities. In recent years, Icahn has taken short positions, betting on stock prices falling, or through other means, such as credit default swaps (CDS), which are used to short commercial mortgage-backed securities.

“The returns would have been much more impressive if we had departed from our activist methodology over the past few years and not shorted (or hedged) more than necessary,” Icahn wrote in a letter to shareholders in August.

He told investors that Icahn Enterprises had performed well by maintaining active positions for a long time, but that its performance had declined due to overly bearish bets. The company has significantly reduced its short positions, and Icahn told investors, “We plan to continue to focus on our activist strategy.”

Icahn Enterprises also has other businesses, including companies in the energy, automotive, food packaging and real estate sectors. The largest holding is CVR Energy, owns 66% of the company’s issued shares. CVR has had solid performance in recent years, as its oil refining and nitrogen fertilizer manufacturing have performed well amid high prices and are one of Icahn Enterprises’ bright spots.

Icahn Enterprises subject to short selling

Icahn Enterprises was targeted by short-seller Hindenburg Research, which argued that the company’s net asset value (NAV) was significantly overvalued and that it did not have sufficient cash flow to support distributions.

Icahn Enterprises subsequently reduced its quarterly dividend per share from $2 to $1. In the first quarter, the company reported a net asset value per share of $10.40, and its current share price represents a 62% premium to NAV.

Should I Buy Icahn Enterprises?

Investors may be attracted to Icahn Enterprises because of its high dividend. One reason for optimism is that the company is returning to its activist roots and reducing some of its short-selling exposure that had been a drag on its investment performance.

However, since that short report was released, the stock has struggled to find its footing and is still down 67%. It will take time to see if a return to its activist roots yields meaningful results, and we believe investors are best avoided the stock for now and look elsewhere for high-yield income stocks.