Shares of Carl Icahn’s closed-end holding company, Icahn Enterprises (NASDAQ:IEP), are down more than 15% today following the publication of a short report by Hindenburg Research. Together, Icahn and his son, Brett, own about 85% of Icahn Enterprises.
First, Hindenburg believes that units of IEP are inflated by more than 75%, while the last reported net asset value (NAV) of IEP trades at a 218% premium. NAV is the value of a company’s assets minus its liabilities and then divided by shares outstanding. For comparison, other closed-end holdings companies — like the ones run by Third Point’s Dan Loeb and Pershing Square’s Bill Ackman — “trade at discounts of 14% and 35% to NAV, respectively.”
In the report, Hindenburg compared IEP to all 526 closed-end funds included in Bloomberg’s database. Hindenburg concluded that IEP’s NAV premium was the highest and more than double the second-highest name.
Hindenburg Releases Short Report on IEP Stock
A reason for the outsized premium could be due to Icahn’s reputation as a formidable investor. IEP stock also has a dividend yield of almost 16%, which cements it as the highest dividend payer among all U.S. large capitalization companies. In addition, Hindenburg points out that institutional ownership for IEP is very low.
Hindenburg states that Icahn Enterprises’ annual dividend equals 50.5% of last reported indicative NAV. This is sustainable due to Icahn and Brett’s massive ownership stake. The two take dividends in units instead of cash, reducing the dividend cash outlay necessary.
Meanwhile, business has been rough for IEP. Since 2014, its investment portfolio has declined by more than 50% while free cash flow burn has totaled about $4.9 billion during the same period. However, IEP has raised its dividend three times since 2014, with the quarterly distribution currently set at $2 per unit. To support the dividend, Icahn Enterprises has engaged in open market sales of IEP through at-the-market (ATM) offerings.
Hindenburg explained in the report:
“In brief, Icahn has been using money taken in from new investors to pay out dividends to old investors. 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’.”
In conclusion, Hindenburg believes that Icahn has taken on too much leverage while sustaining losses at the same time. The short seller also disclosed a short position in IEP.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
