By Simply Safe Dividends. Originally published at ValueWalk.
One investing school of thought is that you should find an amazing investor and ride his or her coat tails to fun and profit.
This certainly worked out well for those who bet on history’s greatest investor, Warren Buffett, by investing in Berkshire Hathaway (BRK.A, BRK.B). You can view Buffett’s high dividend stock portfolio here.
After all, if you invested $10,000 in Berkshire in 1965, your position would be worth a staggering $88 million today.
Of course, the odds that Buffett can recreate that kind of success in the coming years is all but impossible due to the massive size of Berkshire; something he himself freely admits.
However, there are still ways for investors to invest alongside legendary investors, including private equity and hedge fund legends such as Carl Icahn, who is the 38th richest person on earth with a net worth of $19.4 billion.
Icahn runs his empire via a master limited partnership (MLP) called Icahn Enterprises (IEP).
While Icahn Enterprises offers regular investors the opportunity to invest alongside one of the most well-known investors in history and enjoy a 12% yield to boot, this MLP comes with plenty of risks.
Let’s take a closer look to see if the risks make it unsuitable for most dividend growth investors, especially those needing steady income in retirement.
Business Overview
Unlike most MLPs, which generally are involved with energy gathering, transportation, and processing, Icahn Enterprises is a diversified conglomerate that Icahn uses to help raise investor capital for his activist investing empire.
Icahn’s empire owns stakes in 11 different industries (he recently sold his position in Trump Entertainment to avoid conflicts of interest to join the administration) including: auto parts makers, energy companies, casinos, miners, food packaging companies, industrial companies, and real estate.
Unlike most MLPs, Icahn Enterprises has no general partner or incentive distribution rights.
That’s because, while 99% of the MLP is owned by limited partners, Icahn himself, via Icahn Associates, owns just over 90% of the MLP’s units (and chooses to be paid in new units instead of cash).
This structure helps to ensure that Icahn’s stake will rise over time and will always grant him absolute control over the MLP.
In other words, any investor in Icahn Enterprises is basically agreeing to have no say in the management of the partnership but is trusting that one of history’s greatest activist investors can continue growing his empire, and thus, their wealth over time.
Finally, it’s important to realize that while Icahn Enterprises is highly diversified in the number of industries it invests in, the vast majority of revenue, and Adjusted EBITDA comes from its automotive, energy, and railcar holdings.
Meanwhile its investment arm generates highly volatile revenues and earnings, which is par for the course in the hedge fund and private equity world.
| Business Segment | 2016 Revenue | 2016 Adjusted EBITDA | % of Revenue | % of Adjusted EBITDA |
| Investment | -$1.2 billion | -$528 million | -7.5% | -62.7% |
| Automotive | $9.9 billion | $697 million | 60.7% | 82.8% |
| Energy | $4.8 billion | $156 million | 29.1% | 18.5% |
| Metals | $269 million | -$15 million | 1.6% | -1.8% |
| Railcar | $962 million | $379 million | 5.9% | 45.0% |
| Gaming | $948 million | $73 million | 5.8% | 8.7% |
| Mining | $63 million | $1 million | 0.4% | 0.1% |
| Food Packaging | $332 million | $40 million | 2.0% | 4.8% |
| Real Estate | $88 million | $41 million | 0.5% | 4.9% |
| Home Fashion | $196 million | -$1 million | 1.2% | -0.1% |
| Holding Company | $21 million | -$1 million | 0.1% | -0.1% |
| Total | $16.4 billion | $842 million | 100% | 100% |
Source: Icahn Enterprises 8-K Filing
Business Analysis
The unique nature of IEP’s business model (essentially a publicly traded hedge and private equity fund) means that Icahn Enterprises’ sales, earnings, and free cash flow are incredibly volatile. The same is true for its margins and returns on capital.
Source: Simply Safe Dividends
The company’s volatile fundamentals are largely due to the cyclical nature of many of its biggest business segments, such as energy.
In addition, because the investment arm of the MLP operates as an asset manager, its annual contributions to profitability are highly cyclical and lumpy, based on the timing and success of Icahn’s sales of his investments.
While Icahn’s overall track record is amazing, the last three years have been highly disappointing, with Icahn’s returns becoming increasingly negative during one of the market’s strongest bull markets.
Icahn’s lackluster performance is mostly due to his enormous investments into CVR Refining and CVR Partners.
However, that doesn’t necessarily mean that Icahn has lost his touch. After all, the man is famous for being patient and investing for the long-term.
In fact, Icahn and his team of about 20 managers (who are presumably some of the most talented and experienced asset managers in the world) will often build stakes in cash rich companies, and then turn them around over several years before selling for a large profit.
Source: Icahn Enterprises Investor Presentation
However, while Icahn and his team of Wall Street veterans certainly have an impressive track record, that doesn’t mean that this high-yield MLP is a slam dunk income investment.
Key Risks
Since Icahn Enterprises is 90% owned by Icahn himself, IEP is basically a pure “bet on the jockey” stock, one in which you have to be willing to hold for the long-term and sustain some gut wrenching volatility.
Source: Ycharts
In fact, while Icahn has a generally good track record of growing investor wealth, the fact is that this MLP is one of the most volatile stocks on Wall Street, with a beta of 1.69.
That means the stock has historically been much more volatile than the S&P 500 and can experience massive short- to medium-term downturns.
For example, IEP’s stock plunged 82% during the financial crash of 2008-2009) and more recently declined 55% from its late 2014 highs.
Another risk to consider is that Icahn is 81 years old, which means that at some point in the next 5-10 years Icahn Enterprises will likely have to say goodbye to its legendary founder.
While the remaining management will likely stay and continue to run the MLP, there is no guarantee that Icahn Enterprises will be able to continue generating strong long-term returns without him.
What about that 12% distribution? After all, as long as you are getting paid so handsomely to let Icahn and his team maximize their long-term strategy isn’t it worth buying, holding, and riding out such periodic crashes?
Unfortunately I don’t think so because the long-term sustainability of IEP’s payout is highly questionable.
Icahn Enterprises’ Dividend Safety
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The post Icahn At 12% Yield and a Four-Year Low, But Is It Safe? appeared first on ValueWalk.
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