Do activist hedge funds including Carl Icahn’s add value? Should you invest in Icahn Enterprises L.P., a conglomerate with a 15% dividend yield and a stake in Carl Icahn’s hedge fund?
Topics covered include:
- How Icahn Enterprises’ (IEP) investment performance compares to Berkshire Hathaway
- How to analyze individual stocks and why it is challenging
- What are activist hedge funds and do they make a positive performance difference
- What are the risks and opportunities of investing in IEP
Show Notes
The Activism of Carl Icahn and Bill Ackman by Jason D. Schloetzer and Richard Lee—SSRN
The Long-Term Effects of Hedge Fund Activism by Lucian A. Bebchuk, Alon Brav, Wei Jiang—SSRN
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242: Should You Let Warren Buffett Manage Your Money?
Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today’s episode, 422. It’s titled This stock has a 15% dividend yield and has outperformed Warren Buffett. Should you invest?
Berkshire Hathaway and Icahn Enterprises Stock Performance
Three years ago in episode 242, Should you let Warren Buffett manage your money? we looked at Berkshire Hathaway as an outside money manager that we could hire to manage assets for us. We used the process that I used at my old firm to analyze money managers—we looked at the people, we looked at their investment process, and we looked at their performance.
We recently received a question in our Money for the Rest of Us Plus forum about “Would we look at Carl Icahn stock?” It’s Icahn Enterprises LP. The ticker is IEP. This is a diversified holding company. They have segments in the energy space, automotive, real estate, food packaging, some pharmaceuticals, and IEP also owns a portion of Carl Icahn’s hedge fund.
Carl Icahn owns 86% of IEP, and most remarkably, the dividend yield is close to 15%. That has been a stable dividend since 2019. Carl Icahn is 87 years old. That’s a concern in hiring a money manager at that age. What is the succession plan? Is the culture there to be able to continue the manner in which Icahn Enterprises invests? We had the same discussion regarding Berkshire Hathaway. Warren Buffett is 92.
If we compare Berkshire Hathaway and Icahn Enterprises, the biggest thing is the dividend. Berkshire Hathaway doesn’t pay a dividend to common stock shareholders, even though they’ll collect over $6 billion in dividends from their underlying companies that they own. But they prefer to reinvest in other opportunities. Whereas Icahn Enterprises—as I mentioned, the 15% dividend yield. And what we care about is “Is that dividend sustainable?”
In the quarterly investor presentation that Icahn Enterprises puts together, they point out the performance of the common stock, IEP, how it’s done relative to the S&P 500 index, as well as relative to Berkshire Hathaway.
And if we look over the past year, the performance of Icahn Enterprises relative to Berkshire, IEP has outperformed. It returned 14% over the past year, primarily due to the dividend, whereas Berkshire Hathaway is down 0.7%. The overall S&P has been down 5% in the past year, so having a very high dividend provides a cushion when overall markets sell-off.
Over other time periods though, Berkshire Hathaway has outperformed Icahn on a three-year basis, 11% annualized, versus 8.4% for Icahn, and 8.2% for the S&P 500.
That three-year timeframe is important because it was three years ago that we looked at Berkshire Hathaway, and they clearly outperformed the S&P 500 over the past three years. Longer term, Berkshire Hathaway has not done as well relative to the S&P. It’s trailed it on a 10-year basis, a 15-year basis, and has slightly outperformed by 0.3% over the past 20 years on a nominal annualized return basis.
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