2023-03-20 12:31:38 ET
Summary
- Icahn Enterprises is paying its unitholders $2 every quarter for a 15.7% yield.
- The Carl Icahn-backed conglomerate offers income driven by seven operating segments.
- The fat yield doesn't appear to be a trap and is supported by cash and equivalents of $2.34 billion as of the end of IEP's fiscal 2022 fourth quarter.
There is one rule for income investing that I follow and that rule is to avoid yield traps. Icahn Enterprises ( IEP ) currently offers a 15.7% yield as it last declared a quarterly distribution of $2 per depositary unit , in line with its prior payout and against depositary units currently changing hands for $50.91 per unit. I'm in pursuit of income and this yield offers a seemingly distinct investment profile outside of equity and mortgage REITs, BDC, fixed-income CEFs, and yieldcos which form the bulk of my income portfolio. Hence, does IEP pass the core rule for income investing?
Icahn Enterprises is a conglomerate structured as a Delaware master limited partnership with investments spanning a number of public and private companies. The partnership is majority controlled by famed activist investor Carl Icahn who owns 85% of outstanding depositary units. IEP's operating segments are diversified across Investment, Energy, Pharmaceuticals, Real Estate, Automotive, Home Fashion, and Food Packaging.
Revenue And Earnings
IEP earned revenue of $3.1 billion for its fiscal 2022 fourth quarter, this was up 34.8% versus the year-ago comp and a beat by $129 million on consensus estimates. Net loss attributable to Icahn Enterprises was $255 million, around $0.74 per depositary unit, which was an improvement on a net loss of $1.72 per depositary unit in the year-ago quarter.
Market volatility drove outsized losses in the Investment segment of $204 million during the quarter. IEP Investment employs a highly concentrated investment strategy with the top five stocks forming 62.5% of the total $4.2 billion portfolio. FirstEnergy ( FE ), Xerox ( XRX ), Herc Holdings ( HRI ), Newell Brands ( NWL ), and Southwest Gas ( SWX ) were the top five positions with the largest individual percentage ownership in a single company across the top five being 22%.
IEP Investment also held a net short notional exposure of 47% with Carl Icahn stating in November last year that he essentially expects the bear market to last for a while on the back of inflation remaining sticky and elevated in the short to medium term. The dramatic rise in the Fed funds rate has sucked cheap liquidity out of the market and led to depressed equity valuations. This dynamic has led to considerable unrealized losses for IEP's top positions.
The long side of IEP's Investment portfolio are all down over the last 12 months with a significant selloff recorded in recent weeks. For example, Newell Brands is down 15.4% year-to-date and by nearly 50% over the last 12 months. However, the manufacturer and distributor of consumer and commercial products from pens to personal protective gloves and slow cookers, has seen its revenues flatline on the back of weak demand just as it faces higher costs that have driven up net losses.
The Health Of The Distribution
Net income is driven by equity market movements so it will always be volatile. Cash flow from operations for fiscal 2022 came in at $1.05 billion with cash and equivalents at $2.34 billion as of the end of the fourth quarter. Further, IEP's indicative net asset value at $5.64 billion during the fourth quarter was an increase from $5.12 billion in the year-ago comp but a sequential decline from $6.16 billion in the third quarter.
Is this distribution safe? Yes. The most recent payout was the 71st consecutive distribution since 2005 with cash on hand sufficient to meet near-term quarterly distributions. Further, as the dividends form the core driver of IEP's total returns against Carl Icahn's 85% ownership, the propensity for a distribution cut seems extremely unlikely.
Indeed, whilst the units for the limited partnership are down 2.88% over the last 12 months, this is turned into a positive total return of 13% when the dividends are included. Over the last three and five years IEP is up 62% and 84% respectively, outperforming the S&P 500. This is not a yield trap. IEP's Energy operating segment holding CVR Partners ( UAN ), a producer and distributor of nitrogen fertilizer products and which is currently trading at $81.73 per unit paid out a fourth quarter cash distribution of $10.50 per unit. IEP's CVR Energy ( CVI ), an independent refiner and marketer of transportation fuels, is yielding 6.7% and last raised its quarterly cash dividend by 25% to $0.50 per share.
Fundamentally, the core risk unit holders face here will continue to be posed by rising Fed funds rates and the impact on IEP's unit price and the overall health of its long positions in Investment. I do not have a position here yet but will look to add later this month once the current market angst around the health of US regional banking has cleared.
For further details see:
Icahn Enterprises: I'm In Pursuit Of Income With Its 15.7% Yield