Icahn Enterprise LP shares (Nasdaq: IEP), one of the highest yielding stocks in the market right now, was crushed by a short report from the infamous short seller “Hindenburg” and then again by investor Bill Ackman. We’ll review why it’s so short later article, but the most important thing to note right now is that the IEP share price is down over 50% and is currently trading at around $20.00.
Since the company pays out $8.00 per unit dividend annually, the yield has jumped to close to 40%, which if it’s in any way sustainable in shape or form, there should be no investment involved. This is because, at 40%, you can turn an initial investment of $1,000, with no additional investment over 20 years, into a sum of over $2 million.
The real question is – can they afford that amount Move forward?
Icahn projects as a business
There’s been extensive coverage of what the short sellers are claiming here on Looking for Alpha and in the financial media in general, so I’ll give you a detailed overview, but the gist of it is that Hindenburg and then Ackman think the company is over-indebted, saying:
“All in all, we believe Icahn, a Wall Street legend, has made the classic mistake of assuming too much leverage in the face of sustained losses: a combination that rarely ends well.”
They’re talking about the losses the company has reported over the past few years, along with the issuance of a slew of new units. I’ll discuss this in more detail later in the article, as I see it as a net positive for long-term investing (crazy, I know).
The company’s revenue peaked in 2013, when it reported nearly $21 billion, with gross profits of more than $4.6 billion, and has since stagnated or declined. In its most recent full reporting year, the company reported $12.7 billion in total revenue and just $760 million in gross profit.
However, the company was able to reduce its overall expenses over that time period. Interest expense (the amount of cash they pay in interest on their long-term debt) rose from about $1.1 billion in 2015 to just over $575 million in the most recent full reporting year. Their operating expenses also fell to $1.18 billion from about $2 billion in 2015. This has allowed them to boost long-term growth potential once their revenues are sorted.
Revenue fluctuations cause headaches
One problem with the company’s revenue, and something the Hindenburgs point out in their report, is that the company’s trading and investment returns have been fluctuating wildly over the past few years. In the most recent quarter alone, the company reported a loss of $443 million from these activities, compared to gains of more than $900 million in the same quarter a year earlier.
So even though the company is making great strides in reducing its expenses, these fluctuations are a headache for the company when the headline numbers appear to be poor even though the company’s relative decline in net sales from operations was on par with the broader market.
In the most recent quarter, net sales fell by just over 7% (not including net gains or losses from investing activities) while the cost of those revenues fell by nearly 11%, reflecting the declining inflationary headwinds seen in the company’s business over the past few quarter – and an indication Good long term investment for growth potential.
What is Dividend Hoopla all about?
Migration is about the fact that it produces 40% annually without doing anything. If you spend $20 to buy one share of Icahn Enterprises, you’ll get $8 per year in cash dividend payments. The key here is to reinvest that cash into buying more stock units.
If you buy $1,000 in Icahn Enterprises and the company keeps the same distribution for the next 20 years (more or less), you’re looking at a cash pot of over $2 million. Ahhhhh the beauty of compound interest.
Now, the real question is — can they still pay $8 a share for 20 years? Well, there is no real way to know. There are companies that have been paying the same dividend for decades that analysts thought would go bankrupt years ago, and those that were thought recession-proof that collapsed long ago.
The best we can do is assess the next few years and the general sustainability of their payments. This is where unit offers come in.
The company doesn’t actually pay $8 cash for each of the remaining 354 million units. In fact, they pay less than $0.63 per unit in cash, or just $220 million each year. This is because Carl Icahn himself, and the other controlling entities, choose to either give up their distributions or acquire them in new units, which is where the massive increase in units originated from.
This becomes a very simple equation – $2.6 billion in cash for the company They can keep their cash payments for 11 years and 9 months.
Well, okay, that’s not entirely 100% accurate, but it makes my broader view on the company’s future — they can focus on creating a more sustainable sales environment and reducing their exposure to volatile certain investment activities while keeping their distribution high and attractive to investors.
Unit dilution is a problem, but not a big deal
This is a double edged sword, as new units mean your property value is diluted, but there are a couple of reasons I don’t think this will be long-term:
The first is that The amount of new shares is declining. After a big bump when Mr. Icahn and others started taking the new units and issuing new units to the public to fund operations, it’s been down since then, with the last two quarters reporting a drop from $178 million and $249 million in new units to $173 million and $193 million. dollars in a row. The decline was sharper in the last two quarters before that.
The second is that The company currently has a very low bar for sales and profit growth In order to keep up with the rate they are offering for new units. If the company reports equal or higher growth, there will be relatively no dilution and that means you can keep the approximate value of your investment over the long term and enjoy the dividends.
So – sustainable and worth it
As I mentioned earlier, the company only pays about $0.63 per share in cash dividends, so net income has to come up to just that to make it sustainable.
This should be taken with a fist full of salt, since it was only projected by one analyst, but the company is currently expected to report $0.10 in earnings per share in 2023 and then $1.14 in earnings per share in 2024. This means that they They will easily be able to cover their own growth needs as a company and then cash out all the unit holders they want if those numbers hold.
There are many unknowns with Icahn Enterprises, and while I have a strong bullish stance on the company’s complex prospects, I acknowledge that we will need more information as time goes on and the company announces quarterly earnings and dividends.
The first risk is reduced distribution
It is worth noting that the company can cut its dividend by 50% while still maintaining one of the highest yields in the market today at around 20%. Whether or not they decide to do this is unknown, and while I don’t think they will, it’s a risk worth taking into account.
It’s quite clear from the outflows the company has experienced, that some huge risk-averse money has left the company. It’s very likely that the bulk of those who remain, including those who buy at current prices, will be people who are attracted to dividends, even if it’s only temporary.
This means that any material cut to the company’s earnings could have a serious negative reaction in the company’s share price, which could cause the value of your holdings to drop significantly, no matter how many units you’ve accumulated.
Overall, even with my bullish stance, this risk kept me from not fully investing in the company, meaning I wouldn’t have reached the full extent of my position if the stakes had been lower. I have some cash ready to buy more shares for the IEP, in case it goes down further.
Conclusion: worth it
Put simply, I believe that the position in the IEP is worth the risks associated with the company’s reduction of its dividend or its failure to adequately replace investing activities with other sources of revenue.
Not only is the company expected to return to revenue growth in the near future, but its cost-cutting measures should help it report higher earnings growth, which I think will help dispel reports that contributed to the sharp decline in the share price.
Without a single percentage point to appreciate the share price, a 40% yield is worth the investment, and getting the company back to the point where it generates some profits and grows its revenue streams could bring it back to where I think the real fair value lies — around $50.00 per share.
These factors have increased my bullishness on Icahn Enterprises and I will continue to add to my trades over the coming weeks as they trade at such low prices.
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