Icahn Enterprises (NASDAQ: IEP) is a unique conglomerate, but it gets categorized in the energy sector because over 75% of its revenue is derived from its controlling stake in CVR Energy. Add in its dividend, which at current share prices yields a massive 23%, and it's easy to see why income investors looking for exposure to the energy sector might be interested in Icahn Enterprises.
However, either Chevron (NYSE: CVX) or Enterprise Products Partners (NYSE: EPD) would be a better choice to buy. Here's why.
What is Icahn Enterprises?
While it is true that Icahn Enterprises derives a huge percentage of its revenue from the energy sector, it is not an energy company. It is the investment vehicle of famous Wall Street investor Carl Icahn. The company also owns businesses that operate in the real estate, auto, healthcare, home furnishing, and packaging sectors. And, on top of that, it owns a small portfolio of stocks.
In many ways, Icahn Enterprises is like Warren Buffett's Berkshire Hathaway, just on a much smaller scale. The big difference isn't size, however. Buffett is focused on buying and holding good companies while Icahn is an activist investor. Basically, Icahn specifically looks for companies where as a stakeholder, he can agitate for change, either because the companies are troubled or they have hidden value that he believes he can guide them to unlock.
In this way, Icahn Enterprises is actually a fairly aggressive investment choice and the stock's performance has been very volatile. Notably, the share price has been heading mostly lower for about a decade. A short seller's report on the company resulted in a massive stock price decline over the past year.
That 23% dividend yield, meanwhile, may look attractive, but it isn't actually one that investors should count on. First off, Carl Icahn owns 86% of Icahn Enterprises and is currently taking some of the distributions to which he is entitled in units rather than in cash. This makes it possible for the company to pay out more in cash to other investors, which one could easily argue artificially boosts the dividend yield. Also, the company's ability to pay dividends is directly tied to its investment success, which will wax and wane over time.
If you are looking for an energy investment that pays a steady dividend, Icahn Enterprises really isn't what you are looking for.
Buy Chevron instead for oil exposure
Among oil and natural gas companies, globally diversified integrated energy giant Chevron would be a better pick. Chevron's current dividend yield is only 4.1%, but it has increased its payout annually for over 30 years. By contrast, Icahn Enterprises cut its payout in half in 2023 after the short seller report came to light (the huge yield still exists because the stock price fell dramatically, as well).
Chevron's business spans from the upstream (production) through the midstream (pipelines) and to the downstream (refining and chemicals). Energy is basically all it does, but its diversification within the oil and natural gas space helps to soften the peaks and valleys in the inherently volatile sector. On top of that, Chevron has one of the strongest balance sheets among its close peers. That gives it the leeway to take on leverage to help it manage through industry weak patches while continuing to pay dividends and invest in its business.
Buy Enterprise Products Partners for yield instead
If what you are trying to find is an energy investment with a high yield, then master limited partnership (MLP) Enterprise Products Partners will be more your speed. The distribution yield is a hefty 7%. The yield is backed by a distribution that has been increased annually for a quarter of a century and an investment-grade-rated balance sheet. Enterprise's distributable cash flow also covers the distribution by a strong 1.7 times. A lot would have to go wrong before this MLP considered cutting its distribution.
Enterprise Products Partners is one of the largest midstream companies in North America, with an energy infrastructure portfolio that would be difficult, if not impossible, to reproduce. The vast majority of its revenue comes from fees collected for the use of its assets, so the prices of the commodities flowing through its system aren't nearly as important to its performance as a general demand for energy (which tends to remain high throughout the cycle). It is a reliable tortoise. To be fair, its stock growth has been minimal, so its distributions are going to provide the majority of investors' return here. But if you are an income investor, you will probably view that as a positive thing.
Icahn Enterprises might be right for some, but...
If you are looking to invest alongside Carl Icahn, then Icahn Enterprises is going to be a close-to-perfect investment for you. But if you think buying this stock gets you a high-yield energy stock, you will end up owning something you didn't expect. Chevron and Enterprise Products Partners are far better choices as dividend-paying energy stocks.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Chevron. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
Forget Icahn Enterprises: 2 Energy Stocks to Buy Instead was originally published by The Motley Fool