Icahn Companies (NASDAQ: IEP)led by activist investor Carl Icahn, has paid a very attractive dividend yield for years. But the stock has come under intense pressure since last year, when it was the subject of a prominent short-seller and the target of a recent Securities and Exchange Commission (SEC) investigation.
Icahn Enterprises shares are down 44% today from their 52-week high, but I wouldn’t touch them now despite the lower price. Here’s why.
Icahn Enterprises’ Disappointing Performance
Icahn Enterprises is the holding company of famed activist investor Carl Icahn. Icahn is known as the “corporate raider” for his activities in the 1980s. He invests in underperforming companies trading at attractive valuations and plays an active role in reshaping the company to create more value for shareholders.
A recent example of Icahn’s success was his 2013 purchase of HerbalifeAccording to CNBC, Icahn made about $1.3 billion from the transaction, which he completed in full in 2021.
However, Icahn’s recent performance has been less than stellar. From 2014 through 2023, the investment arm of Icahn Enterprises has lost $9.2 billion. One reason for the poor performance was Icahn’s short-selling and hedging activities.
In recent years, Icahn has taken short positions, betting on falling stock prices or making other negative bets using instruments such as credit default swaps (CDS) to short commercial mortgage-backed securities.
Despite the disappointing performance, the stock held up well. Until short-seller Hindenburg Research published a report on the company in May 2023, which made numerous accusations about the holding company. Hindenburg accused Icahn Enterprises of exaggerating its net asset value (NAV), having a “Ponzi-like” structure, and not having enough cash flow to support distribution. After the short report, Icahn Enterprises stock fell 64% the following month.
Icahn’s Recent SEC Settlement
On August 19, 2024, Carl Icahn and Icahn Enterprises settled with the SEC over the commission’s investigation of the company. In an administrative proceeding, the SEC announced that Carl Icahn had pledged securities as collateral to secure personal loans and had failed to file a Schedule 13D describing modifications to those loan agreements.
The SEC said that from 2018 to now, Icahn pledged 51% to 82% of Icahn Enterprises’ outstanding securities as collateral to secure personal loans. However, Icahn failed to disclose those agreements as required in the annual report through 2022. Icahn Enterprises paid a $1.5 million civil penalty, and Icahn himself paid $500,000 in civil penalties without admitting or denying guilt.
Avoid Icahn Enterprises, Buy This Instead
My biggest concern about Icahn Enterprises was its disappointing investment performance, which is why I was skeptical about the company when I wrote about it last year. Icahn was vocal about this disappointing performance, telling shareholders last year that the returns “would have been far more impressive if we had not deviated from our activist methodology in recent years and shorted (hedged) far more than necessary.”
While Icahn may be returning to his activist roots, I wouldn’t want to get hung up on it. On August 26, Icahn Enterprises filed to sell up to $400 million worth of depository units in an at-the-market offering. The move could further dilute current unitholders, and the announced sale comes as the stock is still trading 75% below its price just before last year’s Hindenburg report.
Additionally, the company cut its quarterly dividend payout to $1 per share from $2 per share, which it was from 2019 through mid-2023. While it technically has enough capital to cover its payment in the short term, Icahn Enterprises could struggle to maintain its payout over the long term, and its current high yield could be illusory.
While activist investing is a legitimate way to operate and make money in the market, I prefer the classic buy-and-hold approach to investing for the long term. For that reason, investors are better off with a company like Berkshire Hathawaywhich owns numerous money-making companies, has been buying and holding quality stocks for decades and has a huge amount of cash to invest when the right opportunity arises.
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Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
I Wouldn’t Touch This Ultra-High-Yield Dividend Stock With A 10-Foot Pole. Here’s Why. was originally published by The Motley Fool
