Mat Szwajkos
Icahn Enterprises (NASDAQ:IEP) is an attention-grabbing recession hedge particularly for these searching for increased quarterly money funds to make ends meet. The yield of shut to fifteen% is de facto circuitously depending on present revenue within the partnership so it actually doesn’t matter if the recession is gentle or extreme as a result of the quarterly $2.00 distribution principally is not going to be decreased. Even when the market worth of their securities portfolio drops due to a recession, the excessive distribution yield will maintain the market value of IEP models from dropping considerably. Due to the complexities of the restricted partnership and the U.S. revenue tax code, IEP models could not, nevertheless, be appropriate for all traders.
Excessive Distribution Yield Protects In opposition to a Recession
IEP is at present buying and selling at a yield shut to fifteen%. This excessive yield is predicated on a quarterly distribution of $2.00 per unit. It is a restricted partnership distribution – it’s NOT a dividend. There’s a enormous distinction. Too usually SA authors and SA editors use the phrase dividend when describing IEP’s distribution. It’s taxed in a different way than a dividend for one factor. Usually dividends are pretty extremely associated to present revenue and there’s additionally dialogue of “dividend payout” share. There is no such thing as a direct sturdy correlation between IEP’s quarterly distributions and their present revenue, which is a serious purpose why IEP is a beautiful funding throughout a recession. A few years in the past, there have been some decreases within the annual funds, however over the past 11 years the funds have remained the identical and even elevated.
Quarterly Distribution Per Unit
(Notice: the inaccurate utilization of “dividend” by YCharts)
Most of their $2.00 quarterly distributions are actually simply bookkeeping entries as a result of Carl Icahn and his associates elect to get IEP models. This causes a major improve in models excellent. For the primary 9 months of 2022 models excellent elevated by 33,364,320 and as of November 3 there have been 337,473,951 models excellent. Solely $158 million money was used to pay the distributions for the primary 9 months of 2022. This compares to $2.4 billion money on their books as of September 30. This determine doesn’t even embrace $4.8 billion money held at consolidated affiliated partnerships and restricted money. This is the reason, in my view, their distribution of $2.00 per unit is pretty protected throughout a recession as a result of not a lot money is used to really pay it. There may be, nevertheless, a really excessive degree of long-term debt of $5.3 billion on the holding firm degree, which doesn’t embrace a complete of $1.8 billion long-term debt on the working degree. This debt compares to a steadiness sheet whole fairness of near $9.9 billion.
To repeat once more, even when there’s a recession it’s unlikely the distribution can be decreased. Since IEP unit value is supported by the very excessive yield, it’s unlikely IEP can have a serious value drop throughout a recession. As well as, whereas the market pricing of IEP is considerably influenced by the market worth of their securities portfolio, models don’t commerce based mostly on web present asset worth. IEP shouldn’t be some mutual fund/funding firm that trades on present asset values.
Dilution Problem
One may assert that there’s a severe dilution drawback due to the fixed improve within the variety of models every quarter brought on by virtually all the distributions being paid in further IEP models. For these electing to obtain money distributions the problems related to potential dilution is lessoned as a result of they’re taking a major quantity of “money off the desk” every quarter.
As well as, IEP signed a $400 million ATM agreement with Jefferies final November to boost extra money to make potential new inventory purchases and/or different partnership makes use of.
A rational method to take a look at the potential dilution problem is to take a look at whole returns over an extended time period, in my view. A 1,610% whole return since January 1999 is a really spectacular return. After all, the previous could not point out what future whole returns will truly seem like.
Annual Distributions and Whole Return Since Jan. 1999
Efficiency Since Finish of 3Q
To ensure that IEP to keep away from being regulated as an funding firm beneath the Funding Firm Act of 1940, lower than 40% of their property are funding securities. The 60% or extra are working corporations, equivalent to Icahn Automotive. Since their 3Q report, their largest securities holdings have carried out comparatively nicely. We do not know, nevertheless, how nicely their huge brief positions have carried out. As of September 30, that they had a web brief notional publicity of 54% (66% lengthy and 120% brief). The S&P 500 index is up about 12% because the finish of the 3Q.
Main Securities Holdings Modifications Since Finish of 3Q
Apart from the securities within the above desk, IEP purchased Crown Holdings (CCK) shares in 4Q for a median value of $79.80 that compares to a present value of $88.13 or a ten.4% acquire on their 10.2 million shares. They offered some Herc Holdings (HRI) shares in 4Q and have continued to promote the inventory. On January 20, for instance, they offered a complete of 113,456 HRI shares at costs from $142.42 to $145.42. IEP additionally made on good revenue of $250 million on their Twitter commerce (TWTR) of 15 million shares.
Of their operational space, their 71% owned CVR Power (CVI) is up 21.5% because the finish of 3Q, however their 37% owned CVR Companions (UAN) is down 10.4%. There is no such thing as a buying and selling of their 100% owned Icahn Automotive enterprise or in most of their different working sectors.
Earnings Tax Drawback – Lending for Quick Gross sales
There are a variety of vital revenue tax implications that might influence IEP traders. In search of Alpha is an funding web site and never an revenue tax web site, so I’m limiting my revenue tax feedback to just one per article. I’ve learn many incorrect statements on taxes within the remark sections of my prior articles. With the IRS tremendously growing the variety of brokers a few of those that haven’t been correctly following the tax code when submitting their tax returns may have to regulate how they file their tax returns.
As a result of some brokers, equivalent to Robinhood, are lastly starting to pay their purchasers once they permit the lending of their securities for brief gross sales, I made a decision it will be essential to cowl this problem. The easiest way to keep away from any inaccuracies is to cite IEP’s latest prospectuses relating to those that lend their IEP models for brief promoting:
A unitholder whose models are loaned to a “brief vendor” to cowl a brief sale of models could also be thought-about as having disposed of these models. In that case, he would now not be handled for tax functions as a accomplice with respect to these models through the interval of the mortgage and should acknowledge acquire or loss from the disposition. In consequence, throughout this era:
- any of our revenue, acquire, loss, or deduction with respect to these models wouldn’t be reportable by the unitholder;
- any money distributions acquired by the unitholder as to these models can be totally taxable; and
- all of those distributions would look like strange revenue.
These IEP unitholders in a no tax/low tax bracket could not thoughts having their $2.00 present distribution taxed as strange revenue and might want the extra revenue from lending their IEP models for brief gross sales. The most recent borrow charge for IEP securities is a low 3.9-4.1% relying upon the dealer. A dealer doesn’t pay the total quantity to their purchasers, so I do not assume it’s rational to at present lend IEP models. Even those that haven’t truly instructed their brokers that they will lend all of the securities of their accounts have to instruct their dealer to not lend their IEP models for brief promoting, in my view. It’s a very murky tax problem that’s greatest prevented fully by not lending IEP models.
(Notice: this isn’t revenue tax recommendation, and every IEP unitholder ought to seek the advice of with their very own revenue tax CPA/advisor.)
Conclusion
That is an replace to my prior IEP articles. Icahn Enterprises is a really advanced restricted partnership that pays a really enticing present quarterly distribution of $2.00 that unitholders can elect to obtain as a money cost or in further IEP models. The present yield of about 15% makes IEP a really attention-grabbing hedge towards a recession particularly for individuals who elect to take money. Even when the economic system goes right into a recession, I think about it extremely unlikely the $2.00 quarterly distribution can be lowered as a result of it’s actually not based mostly on present outcomes.
All IEP unitholders ought to instruct their brokers to not lend their models for promoting brief. For U.S. traders needing increased money funds I think about IEP models a purchase, however completely not in IRA accounts due to tax points. Due to the complexities of proudly owning/buying and selling IEP models I’m sustaining my impartial/maintain suggestion – it’s not applicable for each investor.