My Portfolio Holdings – IEP

In addition to posting posting our portfolio and the income we receive from it, I’m going to also post my reasoning for purchasing these companies. Overall, investing is about buying companies that add value to your portfolio. These assets should pay you back in a higher share price, dividends or both. My main focus is on receiving dividend payments so that I can reinvest those dividends by buying more companies. I think that if my strategy was to simply trade stocks based on price fluctuations, I’d be a poor steward of my finances. I’d pay commission fees in what is essentially gambling on hot stock tips. I’d much rather think like a business owner, and invest for the long term. I do speculate sometimes, but not in a way that would risk my family’s ability to give or pay our expenses. Our goal is to create a portfolio of assets that generate income, so that we can use that income to bless others. Let’s look at how IEP accomplishes that.

Icahn Enterprises L.P.

IEP is a master limited partnership that owns subsidiaries in the investment, automotive, energy, railcar, gaming, food packaging, real estate, and home fashion industries. Lead by Carl Icahn, the strategy of this holding company is to take active ownership in undervalued companies using Graham & Dodd's methodology for valuing stocks, while looking for deeply depressed prices.  The holding company also takes investment positions, either debt or equity, in other companies in the stock market.  Some of the subsidiaries of IEP include Apple (AAPL), eBay (EBAY), Netflix (NFLX) and CVR Energy Inc. (CVR).

 

 

 

 

What matters most: Cash money

Before we talk about the company’s cash holdings and ratios, I think it’s important to talk about its debt. Now, IEP has a very unique financial structure from the other companies I invest in.  Nevertheless, IEP still needs to generate enough cash from it's investing activities in order to pay off their debt obligations.  IEP has  $11.5 billion in long term debt, with $108 million due this year.  IEP has 3 senior unsecured notes due in 2016, 2018, and 2020 with interest rates of 7.75%, 8% and 6% respectively. IEP has $3 billion in cash and a total of $17.5 billion in cash, cash equivalents and marketable securities.  IEP can cover its long and short term debt, but it would most likely not sell its marketable securities (Investment Fund) in order to cover its debt payments.  The Investment Fund of IEP allows IEP to generate income through dividend and debt payments, and IEP may leverage the holdings they have in their fund into a subsidiary they will actively manage.  Therefore, it is important for IEP to manage its debt obligations with the cash it already has, so that the Investment Fund continues to produce income for the company. IEP’s current assets total $22.8 billion, and if we exclude their Investment Fund it is $5 billion in current assets. IEP’s current ratio is 1.04 (excluding the Investment Fund, 4.75 including it) and their quick ratio is .63, meaning IEP has an incredibly solid cash position to cover its current liabilities. I usually like to invest in companies with a P/FCF of 15 or below, and would consider adding a stock to my portfolio if it fits this criteria. IEP has operating cash flow of -$308 million and free cash flow per share of   -$14.8 which goes against my investing philosophy.  I'll explain why IEP is in my portfolio at the end of the post.

Dividends – The privilege of ownership

I like to invest in companies that pay a dividend in order to reduce my risk, earn a return on my capital invested, and reinvest those dividend payments into a snowball of dividend checks. IEP currently pays a dividend of $1.5 a quarter, $6 annually, which results in a 5.7% dividend yield. Their dividend payout ratio, when compared to earnings, is 210%. IEP's dividend did increase from last year, but I don't think this trend would continue.  I do believe IEP can continue to make solid value investments, which would then allow it to continue paying its dividend. I like to do some calculations to see how long it would take one share of a company’s dividend payments to equal another share, if prices remained the same and dividend payments were held for the sole purpose of buying one more share, with no compounding. It would take 17.5 years for one share to become two IEP shares with the current level of dividend payments. I also like to calculate how many shares an investor would need to buy now in order to generate the equivalent of one share in dividend payments a year, all else being equal. It’s interesting to note that, if an investor wanted to generate the cash in dividend payments for one share this year, it is equal to the amount of time it would take for one share to double from its dividend yield. Buying 17.5 shares would result in an extra share at the end of the year, generated by passive dividend income.

Book Value – Real Company Value

IEP’s P/B ratio is 2.1, meaning it is priced at double its actual value. I personally like to invest in companies with a P/B ratio of 2 or less, and in some cases I’ll invest in companies with a higher P/B if the income stream of dividends is worth paying more for it. IEP is barely priced above 2 times its intrinsic value. I think its worth being added to my portfolio.

Income – How well a company is managed

I normally don’t like to rely on the income statement as a measure of value. I do think it offers the best glimpse of how well a company is able to manage its expenses while generating revenue, but I’ll rely more on the cash flow statement to find value. AAPL’s P/E ratio is 8.2. Most people invest in companies that have a P/E ratio between 15 and 25, while companies with a P/E ratio of 20 are seen as fairly valued, and using this criteria, IEP is currently undervalued. Honestly I don’t care too much about P/E ratios, but it can help me gauge whether or not I can pass up on a company that is priced too high, and look for other companies. It's important to understand that IEP's financial structure is fundamentally different from almost every other company I'm invested in.  Sometimes ratios and other methods of valuation obscure the real value of the company.

Why I’m Investing in IEP

I’m investing in IEP for a couple of reasons. To start, IEP is run by one of the best asset allocators in the world, Carl Icahn.  We have all heard about Warren Buffet, and although Mr. Icahn hasn't achieved the same type of celebrity status as Mr. Buffet, his investment returns can't be ignored.  Over the last 14 years, IEP investors would have received an annual return of 22%.  With a market crash in 2002-2003 and 2008-2009, these are superb results.  The S&P 500 (with dividends) over the same period returned 3.81%.  Although the dividend of IEP may not grow, and the current yield may be cut, I'm investing in the strategy Carl Icahn has set for IEP.  There is the risk that when Mr. Icahn passes away, the returns of IEP may drop, but deep value investing has been around for over 70 years and continues to have superior results to other strategies.

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