If you are looking at Icahn Enterprises (IEP -0.18%) stock as a potential investment because it has a huge 20%-plus dividend yield, then stop. The dividend yield is not the main reason why anyone should be buying this partnership. The biggest reason to own it is because you want to invest alongside Carl Icahn. But there are some complications around that fact that you need to consider.
Who is Carl Icahn?
Carl Icahn is one of a small number of truly iconic Wall Street mavens. His claim to fame is the activist approach he takes, stepping into troubled situations and pushing for change to improve business performance. He's had some very high-profile wins over the years, with his approach at airline TWA being something of an imperfect example of what he does now within Icahn Enterprises.
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With TWA, he effectively took over the company, installed himself as CEO, took the company private, and then started to make material business changes (including selling off valuable assets). To be fair, TWA ended up in bankruptcy court, which isn't Icahn's goal with Icahn Enterprises' investments, but he did make a lot of money with his investment in TWA. The real takeaway is that he usually gets involved in a big way when he buys a company. This is very different from investors who have a more standoffish approach (Warren Buffett) or ones who prefer to simply work with management (Nelson Peltz).
Once you know this, you can start to consider the buy, sell, or hold decision around Carl Icahn's Icahn Enterprises.
Buy or hold Icahn Enterprises
If you believe that Carl Icahn has the golden touch, then you'll probably be happy owning Icahn Enterprises. Today, the company has exposure to the energy sector, the auto sector, real estate, packaging, and what the company calls home fashion. It also has sizable investments in five public companies, including IFF (IFF -0.20%) and American Electric Power (AEP -0.63%).
There's some diversification in the list, but it almost doesn't matter what he's investing in at any given time. He buys and sells companies and stocks regularly. The whole point of Icahn Enterprises is to have Carl Icahn make investment decisions for you. And sometimes, perhaps more often than not, those decisions will be aggressive ones. If that's what you are looking for, then by all means add Icahn Enterprises to your portfolio or keep it in. But don't stop reading yet, because there are some other issues to keep in mind.
Sell Icahn Enterprises
The massive dividend yield on offer from Icahn Enterprises is a bit of a mirage. It's not that the payments aren't being made. Carl Icahn, who owns 86% of Icahn Enterprises, is currently taking some of the distributions to which he is entitled in units and not in cash. That has the effect of freeing up cash for distribution to those who get cash payments. Moreover, Icahn Enterprises is very clear that its ability to pay distributions is driven by the company's investment performance, and the amount paid could change at any time. If you think you are buying a big, reliable dividend stock, well, that's just not the case.
Then there's the premium investors are paying to invest alongside Carl Icahn. At the end of the first quarter of 2024, Icahn Enterprises estimated that its net asset value, or the value of all of its investments, was a touch under $5 billion. The market cap of the partnership is currently around $7.4 billion. Investors are paying a huge premium to invest alongside this Wall Street legend, a fact that may turn some investors off.
Notably, both of these facts were highlighted by a short-seller report and resulted in a steep sell-off in Icahn Enterprises.
There's more than yield to consider with Icahn Enterprises
Don't let Icahn Enterprises' dividend yield lure you into buying something that doesn't fit with your long-term investment approach. Most conservative dividend investors will probably be better off investing elsewhere, even if it means accepting a lower yield. At the end of the day, Icahn Enterprises is a fairly risky investment that only more aggressive investors should consider owning.
