On May 2, the investigative financial firm, Hindenburg Research, disclosed yet another scathing report. This time, on the ventures of billionaire activist investor Carl Icahn. His Icahn Enterprises (IEP) is a diversified holding company involved in real estate, energy infrastructure, the automotive industry, food packaging, investment management, and mining operations. Today, the company’s quarterly report stated that it is the subject of an investigation by the US Attorney’s office for the Southern District of New York.

Swift Federal Probe into Icahn Enterprises

According to today’s IEP quarterly report (10-Q) filed at the SEC, the company became a subject of investigation just a day after the Hindenburg report was released on May 3.

“The U.S. Attorney’s office for the Southern District of New York contacted Icahn Enterprises L.P. on May 3, 2023 seeking production of information relating to it and certain of its affiliates’ corporate governance, capitalization, securities offerings, dividends, valuation, marketing materials, due diligence and other materials.”

Despite Hindenburg allegations and fresh federal probing, the publicly traded company noted that this inquiry would not have any material impact on IEP’s financial condition. At least, “not currently.”

However, since Hindenburg Research delivered its findings, Icahn Enterprises (IEP) stock is down -39%. The news on the federal investigation will likely have the same effect.

As for quarterly earnings, Icahn Enterprises’ net sales went down 7.6% year-over-year, from $2.96 billion to $2.75 billion. Annual net income is down 147%, from $885 million to $358 million. From December 31, 2022, the company’s total liabilities and equities decreased by 6.2% to $26.2 billion over the following quarter.

The bulk of IEP assets come from investments ($6.6B), due from brokers ($6.3B), and properties, plants, and equipment ($3.9B), while cash and cash equivalents make up $2.6 billion.

Allegations Against Icahn Enterprises

When someone earns the title ‘activist investor,’ it typically means buying significant stakes in undervalued companies and then reshaping the company’s management style and direction. Carl Icahn falls into this category as the ~85% owner of IEP, together with his son Brett Icahn. Much like Warren Buffet, Icahn has left a fertile quote library. Equally so, they reveal how Icahn views investing:

“I’m a cynic about corporate democracy and boards.“

“You learn in this business: If you want a friend, get a dog.”

It is then no wonder that in their report, Hindenburg Research described Icahn Enterprises as ‘the corporate raider”. After having a go at Adani Group and Jack Dorsey’s Block, Hindenburg investigators primarily focus on IEP’s extreme premium to NAV.

By their accounting, IEP’s valuation is overinflated by ~75%. The main reason is that IEP trades at a 218% premium, which is highly anomalous compared to other companies. Net asset value, NAV, represents the total value of the company’s assets. Therefore, it represents IEP’s underlying per-share value.

Abnormally High Dividends to Attract Investors, but Who Will Hold the Bag?

Conversely, investors pay a drastically higher price per share than the company’s worth. This typically happens because of bullish investor sentiment, stock scarcity, or speculation. However, Hindenburg concluded this is due to an extremely attractive dividend yield, at ~15.8%, the highest of any large US company.

The problem is this dividend yield is not supported by IEP’s cash flows and negative investment performance. According to Hindenburg’s allegations, Icahn created a ponzinomics situation in which his large 85% stake allowed him to take dividend payments as additional IEP units instead of cash.

“I don’t want to take the cash out. I like to use the cash to be my army, so to speak,”

Carl Icahn to Financial Times in February 2022

Since that statement, IEP dividend expense has drastically increased, from $17 million to $28 million.

This has the effect of reducing the cash required to deliver the overall dividend payments to other shareholders. After all, fewer cash dividends are then needed to be paid out. Needless to say, such a model is not sustainable, prompting Hindenburg to describe it as “ponzi-like economic structures”.

As evident by IEP’s 39% stock crash following the report, many investors agree. Nonetheless, the company remains confident: “We stand by our public disclosures and we believe that IEP’s performance will speak for itself over the long term as it always has.”

This article originally appeared on The Tokenist

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