Icahn seen clearly now the gains have gone

Receive free Icahn Enterprises LP updates

We’ll send you a myFT Daily Digest email rounding up the latest Icahn Enterprises LP news every morning.

The basics of the Carl Icahn story are fairly simple. Icahn owns most of an investment fund that pays a big dividend. He usually elects to take his dividends in new stock, so it’s not much of a cash cost. Having a big dividend has meant the shares are much more richly valued than the underlying assets would normally justify. Having a high share price means the fund can sell shares and use the proceeds to keep paying the dividend.

Hindenburg Research has described the circularity as “ponzi-like” and Icahn hasn’t really disagreed, because how could he? Icahn Enterprises is (or was) a perpetual motion machine powered by equity issuance.

That alone doesn’t make it a bad investment, though it does require some pragmatism. It’s very obviously silly to expect infinite demand for overvalued shares that will fund the overgenerous dividend and keep the shares overvalued. But for as long as the stock remains priced on prospective yield rather than cash flow or asset value, and for as long as Icahn keeps volunteering to be the XXL bagholder, it’s not an illogical purchase. Matt Levine called the structure “ponzi-like, but in a fun way.”

So how does a stockbroker encourage its clients to buy a fun, ponzi-like investment? Not with the p-word, obviously.

Jefferies — Icahn’s favourite investment bank when raising money, and the only sellside house to issue research on Icahn Enterprises — chose instead to accept the impossible. Central its regular “buy” advice was the idea that Icahn dividends were perpetual.

It’s not possible to know whether purchasers believed this (or indeed whether the analysts did) but in a sense it doesn’t matter. What’s more important is that they could believe other investors did. Eternal dividends were the consensus, based on a survey of one. Then along came Hindenburg to break a wilful delusion at a volume that no one could ignore.

Icahn had been paying a $2 per share quarterly dividend since 2018. Jefferies dropped the perpetual divi forecast in May, shortly after Hindenburg report landed, but still expected an unchanged dividend until 2026, with only a 10 per cent per annum reduction thereafter.

This was a very bad prediction. Icahn last week halved its dividend to $1 per share.

What had changed? In theory, not that much. Icahn Enterprises has been a car crash operationally and reputationally — EPS came in at negative $0.71 rather than the positive $0.25 Jefferies had forecast — but the miracle machinery remains in place. Total second-quarter liquidity reduced by approximately $300mn to $6.6bn and holding company cash fell sequentially from $1.9bn to $1.6bn, whereas halving the dividend will save just $100mn a quarter or thereabouts.

Asked to explain the decision to cut on last week’s conference call, Icahn Enterprises’ president and CEO David Willetts deployed a lot of words:

As we’ve always done historically, we look at a number of different factors, right? I mean, obviously, business performance, economic macros, obligations under the indentures cash flows from the underlying companies. We look at the entire situation.

Obviously, the world has changed, at least for us, given a number of these articles that were in first quarter, second quarter. And so we’ve taken all of that and with the Board have looked at and determine that. For this quarter, it made sense to adjust the dividend to a $1 distribution per unit, right? As we look forward, as we do every quarter, we take those same factors and we reassess what the dividend or distribution should be.

Now to your specific questions with regards to sources I mean, there are several different sources. But I mean, ultimately, what you take a look at is this is a lumpy long-term business, right? We have large wins from time to time, and we have volatility in the market. We are not a company that necessarily has steady, predictable cash flow chunking in and out every quarter. So given that unpredictability and lumpiness, we take a look at all the factors I mentioned to determine how we actually set a dividend or distribution. When it comes to sources, obviously, we have sizable amounts of cash on hand today.

We have a large number of securities in our hedge funds, and we have operating companies, all of which can be sources of profit or sources of capital to return to shareholders or unitholders as we look forward. Anything else to add, Ted?

Ted Papapostolou — Chief Financial Officer

No. You hit spot on, Dave.

And also:

When we take a look at going forward, I think from this quarter, Carl has indicated, although he hasn’t made a final determination that he is likely to take some mix of cash and securities. But his final election hasn’t been determined, right? And obviously, beyond this quarter, there’s no communication as to what his indications are, right? And historically, from time to time, Carl has taken distributions. So this is also in line, I think, with past practice.

. . . which changes everything.

Farewell then to two parts of the perpetual motion machine: Icahn’s reliance on scrip and the no-matter-what cash returns. Shares are down 50 per cent from where they were at the start of May so the chances of raising money also look slim to nil. For all the company’s anger about the “misleading Hindenburg report”, it’s hard not to conclude that, for a while at least, the game’s up.

Jefferies, nevertheless, sees enough to keep recommending Icahn to clients as a “buy”. Its revised 2023 dividend forecast where (presuming it means the fiscal rather than calendar year) $2 + $1 + $1 + $1 = $6, suggests the team retains some belief in the impossible:

Further reading:
— Hindenburg attack is uncomfortable reading for Icahn’s most loyal friends (FTAV)
— An important update on Icahn’s perpetual dividend . . . (FTAV)
— Hindenburg nabs tiny gains off $173bn carnage (Bloomberg $)