It's easy to hate on Icahn Enterprises(NASDAQ: IEP) stock these days. Over the past 12 months, shares have lost more than two-thirds of their value. Some investors believe a turnaround is just around the corner. Others believe the stock should be left for dead.
Is Icahn Enterprises a buy, sell, or hold right now?
Don't expect many dividends
The first thing many investors notice about Icahn Enterprises stock is its 30% dividend yield. Few stocks, if any, are able to support this high a dividend for long. The company has already slashed its quarterly dividend payout from $2 per share to just $1 per share, which will result in a 24% annualized yield -- still outrageous, but closer to being reasonable.
Here's the thing: Don't expect to be receiving a 24% annual dividend for long. The company simply can't afford to sustain it. As of last quarter, it had a net asset value of around $4.8 billion. That figure includes $1.6 billion in cash and cash equivalents. Keep in mind that both net asset value and cash holdings have decreased over the last year. Four quarters ago, net asset value was around $5.6 billion, including cash and cash equivalents of $1.7 billion.
At $1 per share every quarter, and more than 400 million shares outstanding, Icahn Enterprises is set to rapidly draw down its cash reserves in 2024 unless another dividend cut occurs.
IEP Dividend data by YCharts
If the dividend has remained this high for years, you might ask, how then have the company's cash holdings only decreased from $1.7 billion to $1.6 billion over the past 12 months? Icahn Enterprises can generate new cash to plug the hole in a few ways. First, it can sell its investment stakes, something it has done regularly since its inception. Second, it can receive dividends from its investment portfolio.
Finally, it can sell more shares. It has done this aggressively in recent years. Over the past year alone, the company's share count has grown by more than 20%. Since 2010, the share count has risen by more than 300%!
If Icahn Enterprises wants to sustain its dividend without resorting to issuing more stock, there's only one thing it can do: Make rapid gains in its investment portfolio that it can then liquidate and divert toward dividend payments.
IEP Shares Outstanding data by YCharts
Can Icahn Enterprises stage a sudden turnaround?
Let's assume that Icahn Enterprises somehow does hit it big with one of its investments. This success would likely have to come from one of two places: Either its stakes in Carl Icahn's investment funds, or its stake in CVR Energy, a fossil fuel refiner. In combination, these stakes represent more than half of Icahn Enterprises' investment portfolio.
If these stakes skyrocket in value, the company could possibly then afford its sky-high dividend -- at least for a while. Would that make the stock a buy? Possibly not. Right now, Icahn Enterprises trades at 2.2 times book value. Berkshire Hathaway, a comparable company that also consists of an investment portfolio of wholly or partially owned businesses, trades at just 1.6 times book value. There's little reason to believe Icahn Enterprises should trade at a premium to Berkshire. Even if Icahn Enterprises traded in line with Berkshire's current valuation -- its highest valuation in years -- there would still be nearly 30% in downside. That means a 30% increase in the value of Icahn Enterprises' investment portfolio could be wiped out by the valuation multiple coming down to a more reasonable level.
With an unsustainable dividend and an unreasonable valuation, there's just not much to like about Icahn Enterprises stock right now. There's little reason to buy shares, or even to hold on to shares you already own. Perhaps once the dividend is slashed again and the valuation comes down sharply, shares will become attractive, but the time to buy has yet to arrive.
Should you invest $1,000 in Icahn Enterprises right now?
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
