Icahn Enterprises (IEP -0.12%) is majority owned and operated by one of the most famous investors in recent history, Carl Icahn. The Icahn family owns roughly 85% of the company's shares.
Founded in 1987, Icahn Enterprises has provided shareholders with a wild ride. Some years, shares doubled, tripled, or even quadrupled in value. In other years, the stock plummeted in value.
Right now, is Icahn Enterprises a buy, sell, or hold?
Pay attention to this number
Icahn Enterprises has a few things in common with Berkshire Hathaway, another company headed by a famous investor, Warren Buffett. Berkshire Hathaway isn't just one company -- it's a collection of hundreds of companies. Some it owns outright, while with others it retains only part ownership.
Icahn Enterprises operates in a similar manner. It is, at its core, simply a holding company. Its subsidiaries include companies like CVR Energy (NYSE: CVI), a petroleum refiner and nitrogen fertilizer producer; Pep Boys, an automotive parts, repair, and maintenance business; Vivus, a biotech company; and Viskase, which operates in the meatpackaging industry.
Because Carl Icahn essentially controls Icahn Enterprises, owning shares of the company is a bet on his investing prowess. As with Berkshire, one of the best ways to understand whether shares are a buy, sell, or hold is by monitoring the stock's price-to-book (P/B) ratio. This metric gives you a rough idea of how much you are paying for the company's assets.
In 2015, for example, the market assigned the stock a P/B of around 2. That means the market was willing to pay 2 times the book value for the stock, a slight discount to today's levels. In 2022, for comparison, the market was willing to pay around 4 times book value for the company, an elevated figure that has come down sharply in recent months.
Icahn Enterprise has seen its book value shrink in recent quarters for several reasons. While many of the holding company's assets have risen over the past year, there have been two notable detractors.
First, several of its automotive businesses declared bankruptcy, bringing their combined book values down to zero. While Icahn Enterprises retains ownership over the reorganized businesses, bankruptcy is rarely a promising sign.
The second detractor to the company's book value has been the company's operating interest in other Icahn investment funds. In combination with the automotive businesses' struggles, these two business lines have collectively reduced the company's book value by more than $1 billion over the past four quarters.
Given these operating struggles, the market has reduced Icahn Enterprises valuation sharply in mid-2023. Still, on a P/B basis, the stock isn't a clear bargain versus its long-term averages.
But what about the 20% dividend?
Unlike Berkshire Hathaway, Icahn Enterprises pays a dividend -- a big one.
Dividends have long been part of the company's strategy. Based on trailing dividends, the stock currently yields around 30%. It should be noted, however, that the payout was recently reduced from $2 per share to $1 per share. Based on the new rate, the dividend yield is now around 20%.
IEP dividend yield data by YCharts.
How can Icahn Enterprises afford such a high dividend? In many ways, it can't. Last year, the company's debt levels nearly tripled when looking at its debt-to-equity ratio. And over the past 12 months, it has had a net loss of $800 million.
It's not hard to see the writing on the wall. A major short-seller, Hindenburg Research, recently made a major bet against the company, listing the high valuation, unsustainable dividend, and mounting losses as primary motivations.
There's no doubt that Carl Icahn is a legendary investor, and that he is financially incentivized to boost Icahn Enterprise's stock value. Compared to Berkshire Hathaway's 1.5 times book valuation, however, there is little reason to pay 2.3 times book value for arguably an inferior holding company.
Major changes are ahead for Icahn Enterprises. Unless its portfolio stages a rapid turnaround, the dividend will likely be slashed again, perhaps allowing the premium valuation to disappear. This is an attractive business at a certain price, but not at today's price. The stock is simply a sell.
