Hindenburg's Argument: How At-the-Market Offerings Enabled Icahn Enterprises (IEP) to Entice Retail Investors with 15% Dividend Yield

The main argument Hindenburg makes to claim that Icahn is running a Ponzi scheme has to do with IEP's at-the-market (ATM) offerings. These ATMs allow IEP to behave as if it has an ATM, excuse the pun, to pay out high dividends to new and existing shareholders. However, the company itself does not have the dividend paying capacity for that type of dividend yield, as it is not FCF-positive.

I looked into this matter a little bit to see if what Hindenburg is saying passes the smell test. This ATM arrangement started back in May 2019 and for the year ending December 31, 2022, IEP sold 14.6 million depositary units, which are equivalent to IEP's shares. As "at the market" indicates, they were sold at trading prices and IEP netted $759 million in gross proceeds from the offerings in 2022 alone. Divide $759mm by 14.6mm = $51.92. The average closing price of IEP in calendar year 2022 was $52.31: this demonstrates that they were indeed at the market and there was no "deal" involved.

Let's take the 293.4mm units outstanding as of year-end 2021. Icahn owned 88% of the total at the time; the 12% owned by outside investors (mostly retail investors) amounted to 35.2 million. The quarterly dividend has been $2 per unit since March 2019. So $2 x 4 x 35.2 million = $282 million; that's the annual cost to pay out 15% in dividend yield to IEP's existing shareholder base.

Remember the 14.6 million additional units sold in 2022. They would also be due dividends: let's assume they came in at mid-year on average and qualify for 2 ex-dividend dates: 14.6 x 2 x 2 = $58.5 million to new investors. Total dividends paid out to old and new unitholders in 2022 = $340.2 million.

Compare this to the ATM gross proceeds disclosed of $759mm in 2022 10-K. The difference is $419 million from which you would pay Jefferies, meet debt-servicing requirements, infuse working capital to divisions with working capital deficits, make capex payments -- the usual things that companies do with the proceeds from follow-on equity offerings.

Of course, what this also does is dilute the share price. However, since Icahn is taking his dividends in shares, the dilution would seem to be multifold -- at least, that is the initial impression if you don't actually think through the whole charade and see how dilution works. Remember, the program started in May 2019. As of March 31, 2019, IEP had 196.2 million units outstanding; by year-end 2022, IEP's units had increased by 80% to 353.6 million units. You often see this much share increase in early-stage tech companies that issue SBCs like they are going out of style.

Let's see how much of this was due to the offerings and how much due to the stock dividends that accrue to Icahn. When you examine the increase in IEP's outstanding units, you realize that Icahn's share of the total units have been declining since 2019. This is because while Icahn collects his dividends in stock, the sheer proceeds from the offerings, especially in 2021 and 2022, increased outside ownership significantly. The apposite term here is the qualifier "significantly." As of May 2019, Icahn's ownership was 92% of the total; by year-end 2022, his ownership had declined to 85% -- this despite the enormous stock dividends he collected. Why? This is because he collected astronomical ATM proceeds amounting to $759mm in 2022 and an ungodly amount, $833 million, in 2021. In all, Hindenburg says IEP collected $1.7 billion from these offerings since 2019: I checked the math and they seem to be correct.

How this ATM offerings work out is that the existing and new shareholders would get their dividends as promised; Icahn on the other hand would have more shares but his units would increase more or less at the rate of the dividend yield: i.e., he owned 182mm units in May 2019. Multiply that by (1+15%) annually and you get about 300mm units by year-end 2022, which is pretty much what he has right now. However, the units owned by non-Icahn holders increased by almost 40% CAGR largely due to the size of the offerings in 2021 and 2022. What does this tell you? There was tremendous investor interest, particularly retail interest, encouraged by not only the Icahn brand and mystique: the 10-K and SEC filings gushed about the "opportunity to invest alongside an all-star manager" and "activist investor" and former corporate raider par excellence, Carl Icahn and don't forget his junior, Brett Icahn (remember, the son also rises). The Icahn brand was burnished by the retail investor paper mills (Motley Fool, InvestorPlace and Income Investor) clueless that there is something suspicious about the inordinately high dividend rate.

If you invested in IEP, the stock dilution would work out like this: by year-end 2019, IEP was $61.50; at year-end 2022, it was $50.65. The 5-year performance (in price return only) is -18%. But is it really -18% or is that due to the dilution? The market cap at year-end 2019 was $13.2 billion; at year-end 2022, it was $17.9 billion. The market cap actually increased 36% or (10.8% CAGR) over the 3-year period. That was dilution at work. But now what? The stock is now at $38 and the market cap is $13.5 billion, the same level as on Dec. 31, 2019. In other words, IEP has been treading water for the period. But didn't you come out ahead if you consider total return: let's assume an investor who got in prior to 2019. The total return is 2 x 4 x 3 = $24 + $38 = $62; divide by $61.50. You don't have to compute this: you can go as far back as 2013 and it's been at the same level. In other words, you're earning below IEP's equity cost of capital even while earning 15%+ dividends using last week's stock price. Maybe that's why some of the retail money finally woke up and got out last week.

Check the math outlined above and see if you can follow. This doesn't mean all of Hindenburg's arguments are correct. I already see that they may have exaggerated the NAV being too high regarding IEP's controlling stake in Viskase. You need to weigh some of these overstatements against the overall argument regarding the ATM being used to attract income investors to see how strong the case is against Icahn.