Why is there less buzz around IEP (Carl Icahn) than BRK.B (Warren Buffett)?

Question

IEP is 95% owned by Carl Icahn. It most certainly passes the Skin in the Game principle Nassim Taleb likes to talk about.

I happen to own a couple of shares in it because of the man's incredible track record. And it has a ridiculous 9% yield on the equity. I wonder why it's less loved than BRK.B? Not that I do not understand the popularity of Buffet and Munger but I rather would like to understand why IEP is not followed as closely. I can understand the fact he owns 95% contributes to that but I wonder if there is more to it (also other than he is a nasty activist investor with ties to Trump, I 100% don't care about that).

sub question; would it be dumb to compare the 9% dividend yield as a 9% investment fee that Ichan charges shareholders (although they get the cash or reinvest)?

Answer 1

Asking why something is "less loved" will have no good objective answer, but your characterization of the comparative performance of the two stocks does not reflect reality:

Since IEP's inception (as ACP in 1987--it changed tickers in 2007), an investment of $100 into IEP would be worth roughly $2,000 now, had you reinvested all dividends and distributions and held it in an untaxed account, which is an annualized total return of ~10.5%.

An investment of $100 into Berkshire Hathaway at the same time and under the same circumstances would now be worth almost $10,000, reflecting its annualized total return of ~16.2%.

Similarly, over the past decade Icahn Enterprise's performance has been eclipsed by Berkshire's, at 5.6% vs 8.7%, annualized. (10 year performance to end of June 18, 2018).

Another reason could just be the difference in size... there are different ways of measuring both size and value, but Berkshire Hathaway has ~$275 Billion worth of shares available on the market (its "free float"), and trades at just over 1.3x book value, meaning that the shares available to the market represent about $210 Billion worth of assets. Compare that to Icahn Enterprise's free float of ~$1 Billion, trading at just under 2.6x book value, so whose publicly available shares represent less than $400 Million worth of assets. The fact that IEP's price-to-book ratio is almost twice that of Berkshire's indicates that, at least in some sense, it is more "loved": people are willing to pay more for its assets.

Regarding the 9% dividend yield that you mention, keep in mind that (because this is 95% owned by one individual) the yield can go up or down almost arbitrarily, and will likely do so purely to accommodate that shareholder's cashflow requirements. As Bob Baerker points out, in a tax-free account with no trading fees and no slippage, a dividend or other distribution paid out to you has exactly the same effect as selling an equivalent proportion of your holding (assuming the company will make use of the cash it otherwise would pay out), so whether paying a 9% dividend is a good thing or not will depend on how you are taxed on its distributions versus capital gains.

As to the bonus question of whether you should look at dividends as a form of fee, the answer is no. You're being paid the dividends, you're not paying them in.

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1: When I say "performance" or "return" or "total return" in the above, I mean what you would end up with in a tax-free account if you bought $X shares at the beginning of the period and immediately re-invested all dividends back into the stock. This is equivalent to withdrawing the dividends and adjusting your cost basis.

In a taxed account, the difference between the two companies' performance would be significantly starker, since IEP pays dividends (on which you would need to pay taxes before reinvesting them), whereas Berkshire does not.

Answer 2

Without looking terribly closely, I'd say corporate structure has a bit to do with this and his 90% ownership is a con more than a pro.

IEM is Icahn Enterprises LP (Public, Limited Partnership).

Company A, Icahn Enterprises General Partnership (private) owns 1% of Company B, Icahn Enterprises LP (public) and 1% of Company C, Icahn Enterprises Holdings LP (private). Company B, Icahn Enterprises LP (public) owns 99% of Company C, Icahn Enterprises Holdings LP (private). Additionally, Company C owns 100% of Icahn Capital LP, another hedge fund.

It's pretty typical for the separation of the holding company and the management entity. There are 173 million shares outstanding, of which Carl owns 157 million, this is really his personal hedge fund, and you can get a piece. This is an LP, so you'll be receiving a K-1 which may complicate your taxes beyond simple corporation ownership and some years you may have a taxable gain you never actually received (though some years you may get a loss).

A 9% yield on it's face seems great, but at $1.75 per share, that means on this next distribution Carl C Icahn will receive roughly $278,000,000 out of a $13,000,000,000 company. Is he reinvesting, or is he taking that capital out of the company? That's one billion dollars each year being distributed to Mr. Icahn. Would you be reinvesting? He's 81, is this business sustainable when he dies? He has an estimated net worth of $19 billion, about 67% of it is IEP, but where's the other 33%? Has the yield always been this high or is it increasing as he ages? (I agree with you, that in this situation the distribution may be regarded as a fee other owners, if IEP was a mutual fund people would probably scream about the 9% expense ratio...)

Separately, Buffett has really cultivated his persona over the years, I think that has a lot to do with it. There are a lot of wildly successful investors, almost none of them are as openly public as Buffett. And Buffett is way more of a billionaire at $82B to Icahn's paltry $19B.¹

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_{1: Sarcasm if it wasn't obvious}