Owning Icahn Enterprises Partnership Units Is A Complex Investment (2024)

Because many investors do not correctly understand the Icahn Enterprises L.P. (NASDAQ:IEP) historical price performance and the $2.00 quarterly partnership distributions, they avoid buying the partnership units. With some clarifications, bullish stock market investors may want to consider adding IEP to their portfolio after consulting a tax expert. With latest trading of Occidental Petroleum (OXY) by Carl Icahn, who directly and indirectly owns 87.6% of Icahn Enterprises, and Warren Buffett, the market is again comparing the two.

IEP Stock Performance

A major mistake that many make with Icahn Enterprises is just looking at IEP unit price performance alone. This is a major mistake. The partnership pays a quarterly $2.00 distribution that a holder can elect to take in cash or additional partnership units. The better way to look at IEP performance instead of just using IEP unit price changes over a long period of time, is for an investor who elected to take units to multiply their current total number of units they own by the current price and compare that figure with their original cost basis. You should compare the total current value of the IEP holding to total purchase cost. This is something like factoring in stock splits where you just don't look at stock price changes alone over time.

The large quarterly distribution of new units has greatly increased the number of units outstanding. For example, the number of units outstanding on February 26, 2015 was 132.1 million and on December 31, 2021 they were 293.4 million. The impact of this large dilution from issuing additional units via $2.00 quarterly distributions really only impacts investors who elect to take the distribution payments in cash instead of new units. All holders, however, are impacted by the selling of new IEP units by the partnership to raise cash. In 2021, they sold 15.17 million new units that raised $833 million cash at an average price of $54.91 per unit. The total capitalization over time has been partially impacted by the selling new units to raise cash besides just the increase in the number of units via the quarterly distributions.

IEP Stock Price and IEP Total Equity Capitalization

Occidental Petroleum-Icahn vs. Buffett

Many people like to compare Carl Icahn and Warren Buffett. When you invest in either IEP or Berkshire Hathaway (BRK.A) you are really investing in personalities of these two men. Decades ago I had previous dealings with both. Icahn, in my opinion, is "what you see is what you get". Buffett, however, is just the opposite. His image of a boy scout is just all PR. I have a very strong negative opinion of him as a person and as a businessman/investor. For at least the last few decades Buffett's investment performance is much better than Icahn's, but both have done very well over a very long period of time. (Buffett might now be much richer than Icahn because Icahn enjoys spending money-he has many beautiful very large residences and has for decades made large donations to various charities and institutions.)

I assume that Buffett waited until Icahn sold his OXY shares before he started to make new large purchases. Both men butted heads in the past over OXY. I am uncertain about the future of OXY, but the stock has greatly underperformed the rest of the market for the last 40 years.

(The recent OXY sales by Icahn are being included because some readers might be interested in the selling prices and dates.)

Icahn's Occidental Petroleum Sales

Source: SEC 13D/A Mar 2 Filing

Icahn Enterprises Business Model

I divide Icahn Enterprises into three different areas. The first are a group of operating businesses. The second are investments that they do not completely control. The third, is their trading area, which includes a significant amount of hedging/short selling.

4Q 2021 and Annual 2021 Income Statement

Group One-Operating Businesses

Icahn Enterprises' operating group would normally be considered a conglomerate because most of the businesses are in different industries. Decades ago, this diversity was often considered a positive, but I assert that diverse industries often will result in sub-par results and that concentration in a very limited number of higher growth industries increases the probability of better future earnings. The operating results have been rather weak, especially because of supply chain issues. Many investors do not buy IEP for this area and it is not usually a focus by the investment media. The partnership needs to have these operating businesses so it is not considered an Investment Company. (See below under taxes.)

2021 Industry and Consolidated Income Statement

Southwest Gas Tender Offer and Proxy Fight

If Icahn can get actual control of Southwest Gas (SWX), it will then be included in the operating area. If they do not, it will remain in the second group as an investment.

Icahn recently increased the tender offer price from $75 to $82.50 per share for Southwest Gas. The tender offer is for "any and all" which indicates that he is not actually trying to completely buy the company. Often tender offers are for all shares, with a minimum number as a condition, in attempt to gain full control/ownership. Once you get over a certain percent ownership, you can consummate a merger with the non-tendering shareholders only having the right to receive the tender offer price. I should actually state that you usually would receive the tender offer price because there are sometimes variations. (The details of this type of merger depend upon state laws). Icahn Enterprises is actually just trying to increase their ownership of Southwest Gas and get their slate of nominees elected to the board, in my opinion.

The cash needed to buy the SWX shares that Icahn does not already own would be about $4.75 billion. In addition, Southwest has about $6.1 billion net debt outstanding, but this debt would remain at the operating level and would not be direct obligations of Icahn Enterprises. So this could be a very large addition to their operating area, but with SWX trading fairly far below the current offer price of $82.50, the market seems to view the deal as having too many uncertainties.

Group Two-Investments and Activism

The second group is their portfolio of investments, which also gets the focus of most of the attention. Securities of companies held in this area and stock price change year to date are:

Bausch Health Companies Inc. (BHC) down 13%

FirstEnergy Corp. (FE) up 5%

Herc Holdings Inc. (HRI) up 6%

Xerox Holdings down (XRX) 12%

Conduent Inc. (CNDT) down 16%

SandRidge Energy, Inc. (SD) up 27%

Welbilt Inc. (WBT) flat

There was some activity in 1Q 2022 for some of the holdings in this area of their business model:

*Cheniere Energy, Inc. (LNG) up 28%

Icahn recently sold some of their Cheniere Energy, Inc., but they still hold a large position.

Icahn Sale of Cheniere Energy, Inc.

Source: SEC13D/A Mar 7 Filing

*Newell Brands, Inc. (NWL) up 1%

Icahn sold about 10.63 million shares of Newell Brands, Inc. at an average price of $25.86 per share.

*Delek US Holdings, Inc. (DK) up 19%

Delek has agreed to buy 50% of Icahn's holdings for $18.50 per share and Icahn has agreed to withdraw his slate of board nominees.

*Dana Inc. (DAN) down 20%

Dana has agreed to support the election of two Icahn board nominees.

Group Three-Trading

The third area is their hedging/short selling trading. Specific details of positions are not disclosed. It is interesting to compare the amounts long vs short in each industry.

Long/Short Trading Positions By Industry

Source: 10-K

IEP Unit Price vs Book Value

It is not surprising that the IEP unit price to book value ratio keeps rising over time because the value of assets held for a number of years increases in value, but the value carried on the balance sheet does not always increase.

Taxes-Very Important Consideration

Icahn Enterprises L.P. is a publicly traded partnership and is currently taxed as a partnership-not as a corporation. (I was going to give a fairly detailed income tax discussion related to owning IEP, but I concluded that I would just include a very general statement about taxes.) To be taxed as a partnership and not as a corporation, at least 90% of the gross annual income must be "qualifying income" under section 7704. Currently IEP meets that standard. At the same time, IEP does not want to be considered an investment company under the Investment Company Act of 1940, so no more than 40% of their assets can be investment securities. This explains why the partnership owns/controls a large amount of operating businesses.

IEP units holders are responsible for taxes on the partnership income. Income taxes for certain operating corporations that the partnership controls do pay taxes, if any, at the corporate level. Unit holders receive an annual K-1 Schedule (Form 1065). Since the partnership keeps reporting losses, there is no taxable income for the unitholders. Currently, the quarterly distributions are considered just a return of capital, which lowers the cost basis of each IEP unit when they are eventually sold, but they are not taxable like regular dividends. There is also the potential that an investor's unit cost basis would be adjusted for prior losses by the partnership, but that discussion is beyond the scope of this article.

Before investors consider buying/holding/selling IEP in an IRA, they should consult a CPA tax expert with detailed understanding of current and potential issues, such as "unrelated business taxable income"-UBTI.

Because of the current very low interest income on investments, some people needing higher after tax income, buy IEP to get a very high yield of about 15% and they really are not concerned about the income tax impact when their IEP units are sold because that sale may occur after their death. (Consult an expert on estate and inheritance tax issues.)

GET EXPERT TAX ADVICE BEFORE BUYING IEP and do not rely on tax information in this article.

Dividend Yield of 15.53% Is Incorrect

You usually see that with IEP currently trading at $51.51 that it has a "dividend yield of 15.53%". That is not actually correct. First, the quartering payment of $2.00 is a partnership distribution of $2.00. It is not a dividend. It is a return of capital. Second, the 15.53% ignores the compounding impact for those who elect to receive $2.00 worth of new units instead of cash.

For the sake of simplicity, assume IEP has an average trading price of $50 when determining the number of units distributed and that one owns 10,000 IEP units. The unit owner would receive 400 units ($20,000/$50.00) for a total of 10,400 units. Assuming an average IEP price of $60 for the next quarterly $2.00 distribution, the unit owner would receive a distribution of $20,800 ($2.00 x 10,400), which means they would receive 346 units and $40 cash for a total of 10,746 units. In the future, if the average IEP price trades higher, an owner would receive fewer IEP units for each $2.00 and if the average price trades lower they would receive more. The 15.53% number ignores compounding and future IEP unit prices for those receiving new units. For those receiving cash, the 15.53% current yield is correct, but again it is not your typical dividend yield-it is just a partnership distribution of a return of capital.

Conclusion

This article was not intended to be some in-depth valuation analysis of Icahn Enterprises' operations and current holdings. It was meant to cover a few critical issues that investors need to consider when buying/owning/selling IEP units and some comments about recent events.

For those investors who are very bullish on the economy and need high current income, IEP might be an interesting investment. For the rest of us, including myself because I am not bullish on the economy and I don't need any additional current income, I would not recommend buying these partnership units. Since I am required to give a specific rating, I rate IEP units a hold.

B.A. in Economics; M.S. in Finance. I usually write about distressed companies and companies in Ch.11 bankruptcy. I am semi-retired after spending decades in investments.