On May 2, a report from Hindenburg Research made a bold statement: “Icahn has been using money taken in from new investors to pay out dividends to old investors."
The firm continued, "Such ponzi-like economic structures are sustainable only to the extent that new money is willing to risk being the last one 'holding the bag.'" This serious yet extreme allegation sent the stock price crashing. That was 10 days ago, so now that the dust has settled, it seems like a good time to dive in.
It is hard to bet against Carl Icahn (Trades, Portfolio); just ask Bill Ackman (Trades, Portfolio). That said, I am shocked Ackman did not release this new short seller report himself. That it actually came from Hindenburg Research is not a total surprise, however. The research firm recently went after Block Inc. (SQ, Financial) with a report that gained some attention. However, unlike Block, Icahn Enterprises has a long history of creating shareholder value with dividend payments and yield-adjusted outperformance.
Plenty of investors have sold the stock at this point, but does that mean it is a bargain? Only if some of the insights offered by Hindenburg are not that relevant or material to the longevity of Icahn Enterprises. Hindenburg compares Icahn with vehicles run by other star managers, like Daniel Loeb (Trades, Portfolio)’s Third Point and Ackman’s Pershing Square, which trade at discounts of 14% and 35% to net asset value. However, Icahn Enterprises is a completely different model with real operations and providing advantages as a master limited partnership, which means it has a different tax structure and distribution obligations than a standard corporation.
Advantages as a master limited partnership
One of the main tax advantages of master limited partnerships is they are not subject to corporate income tax. MLPs are structured as pass-through entities, meaning the income generated by the partnership is not taxed at the partnership level. Instead, the income is passed through to the individual unitholders, who are then responsible for reporting their share of the income on their personal tax returns, helping avoid the double taxation that typically occurs with corporations.
Further, MLPs often distribute a large portion of their income to unitholders in the form of cash distributions. A significant portion of these distributions can be considered a return of capital, which is not immediately taxable. Instead, the return of capital reduces the unitholder's cost basis in the MLP units, effectively deferring taxes on that portion of the distribution until the units are sold. This can provide a tax advantage to investors, particularly those in higher tax brackets, by deferring taxes and allowing for potentially greater compounding of investment returns. Since Icahn and his son own most of the outstanding shares, this makes total sense.
If a MLP generates losses, these losses can also be passed through to the unitholders. This can be used to offset other taxable income, further reducing the unitholder's tax liability. Also, MLPs often own assets that are subject to depreciation (such as equipment) or depletion (such as natural resources like oil and gas reserves). These deductions can be passed on to unitholders, reducing their taxable income from the partnership. This can result in lower taxes for the investors and greater after-tax returns.
In the case of Icahn Enterprises, these offset the downsides to MLPs like complex tax reporting, tax liabilities in retirement accounts and heavy control by the general partner. Investors tend to trust Ichan and family, and they should.
Icahn Enterprises is a real business, not a Ponzi scheme
More importantly, Icahn Enterprises is a real business, not a feeder fund or a closed-end fund. As such, comparisons on NAV to Ackman or Loeb's firms are simply not that relevant, in my view. Icahn Enterprises is a diversified holding company engaged in several different businesses across real estate, manufacturing and energy. On the other hand, Pershing Square Holdings and Third Point are publicly traded closed-end funds. They are primarily investment vehicles that hold a portfolio of investments, but do not directly run the operations of a diverse range of businesses like Icahn Enterprises does.
In the energy space, Icahn owns CVR Energy LP (CVI, Financial), CVR Partners LP (UAN, Financial) and American Refining Group LP. In Manufacturing, the company owns American Railcar Industries Inc. (ARII, Financial), Viskase Companies Inc. (VKSE) and PSC Metals Inc. In real estate, it owns Bayswater Development LLC, American Real Estate Partners L.P. and WestPoint Home Inc. These companies produce value for shareholders, making the NAV comparison rather nonsensical.
Fair criticisms
Outside of the irrelevant NAV comparisons, there are definitely some fair points made in the Hindenburg report.
For instance, the fact Jeffries has been the only large investment bank covering the stock seems to be the secondary red flag raised. To the uninitiated, it may even sway decisions; however, there are only two large investment banking analysts that cover Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial). The most damaging evidence raised is that the “dividend is entirely unsupported by cash flow and investment performance, which has been negative for years.”
Hindenburg said, “IEP reported $455 million in 'real estate holdings' in its most recent quarter. The reported values in this segment have been remarkably stable for years despite declining net income and despite including (i) the Trump Plaza in Atlantic City, which was razed to the ground in 2021; (ii) a country club that became nearly insolvent in 2020 before ownership reverted to its members in 2021; and (iii) a lack of transparency on other assets and valuations.”
Icahn Enterprises is highly levered, with $5.3 billion in debt and maturities of $1.1 billion, $1.36 billion and $1.35 billion due in 2024, 2025 and 2026, respectively. It also has $2.6 billion in unrestricted cash and equivalents as well as $6.6 billion in long-term investments. The company has around $5 per unit in cash at the holding level and about $14.50 per unit including operating cash.
Take the yield
Since 2013, Icahn Enterprises has paid out north of $70 in dividends, which only sweetens the pot if those continue into the future. When Hindenburg published its report, the company had a market capitalization of $18 billion. Now it is priced closer to $11 billion. Yet Icahn, the billionaire investor who made nearly all of his money finding undervalued assets, has stayed the course by keeping dividend at $2 per quarter.
In fact, on Wednesday, Icahn Enterprises had its earnings call. President and CEO David Willetts had this to say:
“IEP has $1.9 billion of cash on hand and $4 billion of additional liquidity in the investment funds and we're well-positioned for future success. We have full confidence in the integrity of our presented financials in our reporting. 90% of our NAV valuations are comprised primarily of either mark-to-market securities or audited GAAP book values or external valuations. The remaining 10% are valued on a market comparable basis using historic EBITDA. Our dividend policy is based on our assessment of IEP's ability to return capital to unitholders over long-term basis. We generate liquidity through operations, selling investments, and selling companies. Since 2017, the firm has generated over $5 billion of cash from successful sales of controlled companies.”
It seems like every analyst is now piggybacking this report of non-relevant comparisons instead of thinking about the underlying business, which still looks poised to produce long-term value for holders of Icahn Enterprises, especially at this price point.
