Corporate raider Carl Icahn has lost $15 billion since the release of an exposé by Hindenburg Research. That’s over $900 million a day.
The Hindenburg Report
Hindenburg claims that Icahn’s holding company, Icahn Enterprises, is structured like a Ponzi scheme. Repeated share sales support an unusually high 28% dividend.
In brief, Icahn has been using money taken in from new investors to pay out dividends to old investors. Such ponzi-like economic structures are sustainable only to the extent that new money is willing to risk being the last one “holding the bag”.
Hindenburg also alleges that Icahn Enterprises inflates the values of its assets. Since the release of the report on May 2, the stock has fallen by nearly half in just 16 trading days, costing Icahn billions.
From Bloomberg:
“He’s never been humiliated like this,” says Mark Stevens, Icahn biographer and founder of consulting company MSCO.
A History of Losses
Icahn Enterprises stock has lagged for years, weighed down by huge losses. Again from Bloomberg:
It’s hard to argue about Icahn’s lackluster performance of late. This has been a lost decade for Icahn Enterprises stock. The price has fallen more than 60% over the past 10 years, while the S&P 500 has gained about 153%. Dividends have made up some of the difference: Icahn Enterprises has handed stockholders a total return of about 6%. But the S&P has returned roughly 206%.
Icahn made massive bets that a financial crisis was coming. When those short bets didn’t pan out, he lost billions.
Icahn Enterprises’ Future
Now, federal prosecutors are investigating Icahn Enterprises. So far, no charges have been filed.
I don’t know if Icahn acted improperly. But I do know that a 28% dividend isn’t sustainable.
This means you’re paying out the entire value of the company every 3.5 years. This would be an incredible strain even for the most profitable companies.
For a business making big losses, it’s impossible.
I also disagree with Icahn’s bets on a financial crisis. Although crashes come and go, the long term trajectory of markets, technology, and humanity is upward.
Financial engineering and short bets can work — sometimes. But the better approach is to buy great businesses for the long term and bet on the future.
2021 Berkshire Hathaway Annual Letter
“Never bet against America.” – Warren Buffett
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