This Stock Has a 15% Dividend Yield and Has Outperformed Warren Buffett. Should You Invest?
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Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I'm your host, David Stein. Today's episode 422. It's titled, This Stock Has a 15% Dividend Yield and Has Outperformed Warren Buffett. Should You Invest?

Three years ago in episode 242, Should You Let Warren Buffett Manage Your Money?, we looked at Berkshire Hathaway as an outside money manager that we could hire to manage assets for us. We used the process that I used at my old firm to analyze money managers. We looked at the people, we looked at their investment process, and we looked at their performance.

We recently received a question in our Money for the Rest of Us Plus forum about would we look at Carl Icahn's stock? It's Icahn Enterprises LP. The ticker is IEP. This is a diversified holding company. They have segments in the energy space, automotive, real estate, food packaging, some pharmaceuticals, and IEP also owns a portion of Carl Icahn's hedge fund.

Carl Icahn owns 86% of IEP and most remarkably, the dividend yield is close to 15%. That has been a stable dividend since 2019. Carl Icahn is 87 years old. That's a concern in hiring a money manager at

at that age? What is the succession plan? Is the culture there to be able to continue the manner in which Icon Enterprises invest? We had the same discussion regarding Berkshire Hathaway. Warren Buffett is 92. If we compare Berkshire Hathaway and Icon Enterprises, the biggest thing is the dividend.

Berkshire Hathaway doesn't pay a dividend to common stock shareholders, even though they'll collect over $6 billion in dividends from their underlying companies that they own, but they prefer to reinvest in other opportunities. Whereas Icahn Enterprises, as I mentioned, the

the 15% dividend yield. And what we care about is, is that dividend sustainable? In the quarterly investor presentation that Icon Enterprises puts together, they point out the performance of the common stock, IEP, how it's done relative to the S&P 500 index, as well as relative to Berkshire Hathaway. And if we look over the past year, the performance of IEPs,

Icon Enterprises relative to Berkshire, IEP has outperformed. It's returned 14% over the past year, primarily due to the dividend, whereas Berkshire Hathaway is down 0.7%.

The overall S&P has been down 5% in the past year. So having a very high dividend provides a cushion when overall markets sell off. Over other time periods, though, Berkshire Hathaway has outperformed ICON on a three-year basis, 11% annualized versus 8.4% for ICON and 8.2% for the S&P 500. That three-year time frame's important because it was three years ago that we looked at Berkshire Hathaway

And they clearly outperformed the S&P 500 over the past three years. Longer term, Berkshire Hathaway has not done as well relative to the S&P. It's trailed it on a 10-year basis, a 15-year basis, and has slightly outperformed by 0.3% over the past 20 years on a nominal annualized return basis. And one of the discussions in that episode 242 is given Berkshire

Berkshire Hathaway has not been able to outperform. Would they be able to going forward? And certainly over the past three years, they have. If we look at Icon longer term, though, on a five-year basis, it's returned 13.2%, outperforming Berkshire Hathaway, which has only returned 8.8%. On a 10-year basis, though, Icon has trailed the S&P 500 and Berkshire Hathaway.

The 10-year return for ICONS is 7.5%. 15-year returns, but even worse, at 4.1%, trailing Berkshire Hathaway by 4 percentage points. But then on a 20-year basis, the return's been incredible. Close to 16% annualized versus 10.4% for the S&P 500, and as I mentioned, 10.7% annualized for Berkshire Hathaway.

That makes it a little challenging when you look at a stock, and it's often the same when looking at a money manager. There are time periods, trailing time periods, when the manager or stock may be underperforming, and other time periods when it's outperforming. I started to look at the financial statements and presentations of ICOs.

Icon Enterprises. And in doing so, I was reminded of the many money managers that I have met with over the years, met with analysts and walked through how they go about selecting individual stocks. And in going through that exercise, I again realized I'm not real good at that. This is not something that I enjoy doing. I just don't like to look at a very complicated, quote

which Icon Enterprises is, and then try to decide by looking at those financial statements, the ownership structure, decide what the growth prospects are from the underlying subsidiaries, consider competitive threats, and ultimately try to determine whether the stock is missed price. Are the consensus of investors wrong about Icon Enterprises? It sells for $54 per share should the

the price be higher. The price hasn't really moved much in the past five years. It's trading about where it was in 2016. It has gone up and down, but most of the return has come from the dividend.

When we purchase a stock, we're saying the consensus is wrong, that the stock will do better in terms of revenue, earnings, and dividends than what investors expect. Because if the stock does worse than consensus, then the stock is likely to sell off and underperform.

That's why I prefer to invest in index funds and ETFs, because when you have a number of holdings, hundreds of holdings that make up the index fund or ETF, some of those holdings will surprise to the upside, do better than expected, and outperform. Some will do worse than what the consensus expects. They'll

They'll sell off and underperform. And those outperforming stocks will cancel out the underperforming stock. So over time, the performance of the index fund or ETF is driven by the dividends and how the dividends grow and the cash flow growth. And then it can be influenced by what investors are paying for that cash flow now versus in the future.

I like the simplicity of that. These long-term performance drivers, which in turn, the dividend growth are a function of, is the economy growing over time? Is the population growing? Is innovation increasing? Is productivity increasing? And those big macro things flow down into corporate earnings growth, which allows for companies to pay dividends and those dividends to grow and stocks grow.

appreciate. However, when we're looking at one company, IEP, if something happens that the market doesn't anticipate on the upside or the downside, and we're worried about the downside, then maybe the dividend gets cut. Maybe there's some management changes. Maybe Carl Icahn runs into some health issues and the stock sells off significantly.

That's the essence of diversification. However, the member asked about it, and it's an interesting stock because IEP began as American Real Estate Partners in 1987 and now has seven operating segments, $28 billion in assets. There are a number of underlying subsidiaries for Icon Enterprises, and there's the investment arm that is buying companies...

On an activist basis, if you look at their top holdings of the investment arm, First Energy is one, Southwest Gas, Newell Brands, Xerox.

Admittedly, this is a complicated structure. And as you go through the financial statements, it is complicated. And there are individuals that just love to do that. I'm not one of them. And so when we talk about whether we should invest in IEP, I'll share some thoughts. But ultimately, I prefer asset classes because there's more margin of safety there because I don't have the skill set to invest

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Carl Icahn is an activist investor. He said, there are lots of good CEOs in this country, but the management in many companies leaves a lot to be desired. What we do is bring accountability to those underperforming CEOs when we get elected to boards.

What activist hedge funds do, and this is from a paper by Richard Lee and Jason Slotzer. It was titled The Activism of Carl Icahn and Bill Ackman. I'll link to it in the show notes. But they point out that a hedge fund, including Carl Icahn's hedge fund, which is partly owned by IEP, they're more likely to start purchasing shares and seeking for change in companies where there's an

an entrenched board, a board of directors, that they have failed to establish a clear corporate strategy. And they have failed to replace a CEO in a timely manner, making it difficult for the company to execute on its strategy. Or the activist investor might want alternative uses for some of the company's valuable non-core assets.

to be a divestiture. Or the activist fund might want to maximize shareholder value by taking the company private. Or maybe the company has excess cash and activist investors wants the company to increase the dividends or pay out some of the cash and dividends.

IEP describes their process is to take significant capital in a company, take that capital, invest it in the company, purchase the stock and the debt, maybe even take control of the company, and then deal with the board of management on these issues. And sometimes there could be proxy fights as they fight to get a board seat as part of the annual vote by shareholders.

IEP has an investment and legal team that works on trying to unlock the value in the company.

But does activism work? That in and of itself is controversial. I reviewed a number of academic papers looking at the long-term effects of hedge funds taking activist positions and the consensus, generally speaking, that the companies do better. They do outperform. They get some higher returns and it isn't a pump and dump scheme where an activist investor takes the position, the stock goes up because shareholders get excited, but

but ultimately the stock underperforms down the road and so it didn't have an impact. It does appear that there are some excess returns that activist investors deliver, but that's not a clear-cut conclusion. There are other papers that criticize the methodology that these studies use or these academics use to determine that activist hedge funds were successful.

Ultimately, though, the success of activism or whether a hedge fund wants to do that, and most hedge funds don't do that, it depends on one's philosophy of governance. There's the idea that publicly traded companies should use a board-powered model, that the board is in charge. The board is responsible to make sure that management is being successful, and it's not the responsibility of

shareholders. That's a shareholder-powered model where there's belief that activist shareholders should be able to make changes to the board. A board-powered model believes the board is the board. That's their responsibility. Now, you can get these entrenched boards. And so I appreciate the work of boards. It's an incredibly difficult task to oversee a publicly traded company. I think there is some benefit to shareholder activism, even by hedge funds. But

But it isn't strictly based on releasing shareholder value. One of the developments we've seen in the last decade is the idea of stakeholder theory, that companies have a broader role in society, not just to maximize shareholder value, but also be influential in the community, in helping their employees, in making sure that

They're not passing on externalities, negative externalities or cost onto society that within the company itself, it's capturing and paying for the cost that offset its revenue.

One of the other criticisms of these studies on whether activist hedge funds add value is one paper pointed out that oftentimes there's the assumption that there's some animosity between the activist hedge fund and the board and management, that they're against each other. That's not always the case. Sometimes there can be collaboration with the shareholders, including activist shareholders.

So there's not a clear consensus of whether activist hedge funds actually have delivered excess returns. In the case of icon enterprises, they have over longer term periods, but not over every period. I mentioned the underperformance on a 15-year analyzed basis. So strong five-year outperformance, not so great on a 15-year basis.

but strong on a 20-year basis. And that is the result of some activist positions not working out so well, while others have. In the investment reports by IEP, they listed off a number of successful sales of companies they took control of, restructured, and ultimately sold.

And the reality is there is enough cash flow in this business, from what I can see, to sustain the 15% dividend yield. We just have not seen massive appreciation at all in the stock itself. This is an income play at this point.

One of the big question marks with Icon Enterprises is the age of Carl Icon. They had a management change in terms of the CEO. About a year ago, the former CEO had to resign due to some family issues. They were very upfront that this was not a disagreement with management, but they brought in a new president and CEO, David Willits. Well, he was the CFO for about a year and

And then he was promoted. As you go through other senior portfolio managers at ICON, some have been there close to two decades. Others have been there less than a year.

Carl Icahn clearly has been a brilliant investor. We don't know to what extent the success of Icahn Enterprises is due to the team structure or is due to Carl Icahn. And that's difficult to say. And it's one of the risks of investing in Icahn Enterprises. Should you invest then?

I don't know. It is diversified, but there definitely is some personnel risk. It also depends on your position on activist hedge funds, shareholder activism. Perhaps you take a small position in Icon Enterprises to collect a 15% dividend yield and hope that something doesn't happen that results in a sell-off in the shares because of a personnel change at the company or...

The cash flow is no longer there to sustain the dividend. But I'll be the first to admit I am not an expert on IEP. I probably won't take a position. I am much, much more comfortable taking positions in asset classes where I have more control. And that doesn't mean I haven't taken positions.

positions in individual companies. I have bought preferred stock in individual mortgage REITs. But again, a mortgage REIT is an asset class. My investment style is much more asset class focused, and it always has been as an investor.

I have spent time selecting individual companies and I'm just not good at it and I don't have the patience for it. And so another takeaway from this episode is choose a style of investing that meshes with your interest, with your skills, with your talent.

I prefer asset class investing. Some people just prefer pure index funds, buy and hold, and not worry about it. It's a viable strategy, whereas others just love to build out a portfolio of individual stocks.

No matter what our approach to investing, we should track performance to make sure that we're actually adding value. We've seen in this episode, we looked at, did Berkshire Hathaway add value? Did Icon Enterprises add value? And over the longer term, Icon has.

Berkshire, it's been more of a struggle. But over the past year, we've seen a rebound in Berkshire. So we'll see if that continues. But clearly, the management issues with Berkshire remains. It's amazing that both Warren Buffett and Charlie Munger are active in their 90s, very, very active in investing. And that is one of the things I love about investing. It's not something you ever have to retire from as long as you enjoy it.

That then is episode 422. Thanks for listening. I have thoroughly enjoyed teaching you about investing on this podcast for almost nine years now. But some topics are just better explained in writing or with a chart. That's why we have a weekly email newsletter, the Insider's Guide. In that newsletter, I share charts, graphs, and other materials that can help you better understand investing. It's some of the most important writing I do each week.

I spend a couple hours on that newsletter each Wednesday morning as I try to share something that will be helpful to you. If you're not on the email list, please subscribe. Go to moneyfortherestofus.com to subscribe to the free Insider's Guide weekly email newsletter. Everything I've shared with you in this episode has been for general education. I've not considered your specific risk situation.

I've not provided investment advice. This is simply general education on money, investing, and the economy. Have a great week.