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Prison Stocks No Longer Hot: They're Going REIT

By: Investor's Business Daily
Posted: 1/10/2013 6:05:00 PM
Referenced Stocks: CXW;GEO

In the 1980s and '90s, private prisons were hot stocks, sometimes posting triple-digit earnings gains. Those days appear to be over.

The market's two private prison stocks are becoming REITs.

Geo Group ( GEO ) announced on Jan. 2 that it had completed the process to convert to a real estate investment trust, effective Jan. 1.

The REIT structure often leads to bigger dividend payouts, and that appears likely with Geo. In an early December news release, the small-cap company said it expected to pay an estimated dividend in 2013 of $2.20 to $2.40 a share.

By law, a REIT must pay out at least 90% of taxable income.

Geo paid a 20-cents-a-share quarterly dividend in November. On an annualized basis, the yield had been in the 3.5% range before the stock jumped on the REIT news.

At the current price, the estimated REIT payout would be about 7.2%.

Earnings for Geo have been steady but lackluster.

The five-year EPS Stability Factor is 9 on a scale of 0 (calm) to 99 (erratic). Earnings growth is expected to check in at 3%, when 2012 results are announced in February. The Street expects 6% EPS growth in 2013 on a less than 2% rise in revenue.

Given those realities, it's hard to imagine Geo as much beyond a yield play. The stock price did double last year, but that probably was related to the REIT-related speculation. From the start of the bull market in March 2009 through 2011, Geo lagged the indexes -- up 22% for Geo vs. 66% for the S&P 500.

Geo owns or operates 101 facilities in the U.S., Australia, the United Kingdom and South Africa.

Corrections Corp. of America ( CXW ) is awaiting a ruling from the IRS on its plan to become a REIT.

The midcap company said in a Jan. 2 news release that it has completed the necessary reorganization to qualify as a REIT.

The company operates 67 facilities in 20 states, including 47 company-owned units.

Apart from last year, the stock has mostly lagged the indexes. The annualized yield is 2.2%.

CCA has a five-year Stability Factor of 3. Earnings are expected to be flat for 2012 when posted in February. The Street estimates earnings will rise 5% this year on a less than 1% increase in revenue.