Icahn Enterprises (NASDAQ: IEP) stock was down 25% on Friday. IEP stock fell on the results announcement and, more importantly, on the halving of the dividend. Yes, it’s still 12% at this lower stock price but there’s at least a hint of the idea that Hindenberg was right about this being evidence of the dividend trap. Icahn Enterprises paying out more in dividends than was useful, thereby reducing the capital value of what remained. That’s why the dividend yield was so high - the stock price was discounting the future loss in market capitalisation.
To look back to that first Hindenberg report on Icahn Enterprises: “Icahn Enterprises (NASDAQ: IEP) stock is down 35% since the publication of that Hindenburg short selling report into the company. It's possible to think of this as being merely the destruction of value by someone telling tales. That's the usual reaction of most corporate managements to most short selling reports. It's even possible that that's the correct reaction to some of them - it's easy enough to cobble something together that will hit an already fragile stock price after all.
On the other hand short sellers can - and we don't claim either way over Hindenburg, either this report or any other - do the world a favour by uncovering corporate malfeasance or even just overly aggressive accounting practices. “
Icahn Enterprises stock price from Google Finance
Leaving aside most of the detail the Hindenberg allegation is that IEP is paying out more than its earnings in dividends. No, not more than accumulated earnings - that would be highly illegal. But more than it’s making. So, the market capitalisation of Icahn Enterprises will decline in the future. There’s the benefit of the current cashflow to investors, but that decline in capital value. This is often referred to as the “dividend trap”. Icahn himself takes his dividend in scrip - new shares. So, his control of the company grows with each declared dividend. The whole being funded by new stock issues.
Whatever we might think of this it’s something that cannot go on for ever - if it’s even true that this is what is happening. The results themselves don’t settle this either way. They’re also not very good.
But the issue that killed the stock price there is that halving of the dividend. Well, that and the announcement that the SEC is now having another look.
As to Hindenberg? They don’t think this is over yet. As they say: “On May 2nd, we predicted that "Icahn Enterprises will eventually cut or eliminate its dividend entirely, barring a miracle turnaround in investment performance." Today, $IEP reported further investment losses and slashed its dividend by 50%. We remain short.”
Now, that Hindenberg were right last time doesn’t prove that they’re right to remain short. But it is something worth thinking about.
