Realty investment trusts (REITs) are known for their high-yield dividends, and The GEO Group (NYSE: GEO) is no exception. The company, which handles and owns 123 private domestic safe and secure centers and post-correctional domestic centers with 93,000 overall beds in the United States, Australia, Africa, and the United Kingdom, uses a dividend with an annualized payment of $1 a share. At the companys current share price, that provides it a yield of around 12.6%.
That may sound great … until you discover why the yield is so high. GEO Groups stock cost has actually fallen by more than 32% in the last year, so despite payout cuts this year and in 2015, the yield stays high. Im not that anxious about the security of GEOs dividend, however the company appears to be a timeless dividend trap because its earnings are trending downward.
IMAGE SOURCE: GETTY IMAGES
The hits keep on coming
In 2015 was challenging for companies that operate private jails. The COVID-19 pandemic indicated extra expenses to make jails and immigrant detention centers more secure for prisoners, detainees, and employees. It also led to a drop in inmate populations.
According to The Marshall Project, the number of people jailed in the U.S. fell from 1.3 million in March to 1.2 million by June. Prisons, in an effort to avoid bringing the coronavirus into their populations, stopped accepting new detainees. Court closures meant less people were being sentenced, and parole officers were less active and sent less individuals back to jail for parole offenses.
With the modification of federal government in Washington, this isnt the finest of times to be in the personal jail service. On Jan. 26, President Biden signed an executive order directing the Justice Department not to renew its agreements with personal jail operators.
The order applies to any personal centers gotten in touch with the Bureau of Prisons and the U.S. Marshals Service. It doesnt yet use to all agencies. Migration and Customs Enforcement, for instance, has agreements with personal companies, consisting of the GEO Group, to apprehend undocumented immigrants.
Looking at a recent financier discussion by the company, its simple to see that the eventual outcome of Bidens policy might be a 27% cut to GEO Groups revenue.
IMAGE SOURCE: The Geo Group
Migration and Customs Enforcement, for example, has agreements with personal companies, consisting of the GEO Group, to apprehend undocumented immigrants.
GEOs adjusted FFO last year was at its most affordable level since 2016.
Genuine estate financial investment trusts (REITs) are understood for their high-yield dividends, and The GEO Group (NYSE: GEO) is no exception. GEO Groups stock price has actually fallen by more than 32% in the last year, so in spite of payout cuts this year and last year, the yield remains high. Im not that anxious about the security of GEOs dividend, but the business appears to be a classic dividend trap due to the fact that its profits are trending downward.
Even prior to the executive order, the Bureau of Prisons selected not to restore its contracts with three GEO facilities; those agreements expire this quarter. The company said its staying Bureau of Prisons agreements might also not be renewed as they turn up.
In March, GEO discovered that the Marshals Service would not restore its agreement for the businesss 222-bed Queens Detention Facility in New York. The facility created $19 million yearly in revenues, the company stated..
The dividend may be safe, however the share rate not so much.
You need to give GEO credit for doing the clever thing, trimming its quarterly dividend 29.2% to 34 cents a share in 2015 and after that once again by 26.5% to 25 cents a share this year..
While the cuts are concerning, the dividend appears well covered by the companys expected changed funds from operations (FFO) this year, which management stated need to remain in the range of $1.98 per share to $2.08 per share.
The companys 2020 revenue of $2.35 billion was below the $2.47 billion it generated for 2019, and net earnings of $113 million was below $166 million the year prior to. In the 4th quarter, its profits of $578.1 million was a 7% drop year over year. It was likewise the fourth consecutive quarter of top-line decreases.
REITs are better evaluated on the basis of their FFOs, and those metrics succumbed to GEO Group as well. The company reported yearly normalized FFO of $229.3 million, below $260.7 million in 2019; changed FFO was $300.6 million, compared to $328.4 million in 2019. GEOs adjusted FFO in 2015 was at its lowest level because 2016.
GEO Group is fighting versus patterns.
Unlike some REITs that were negatively impacted throughout the global pandemic by renters that had trouble paying the rent, GEOs consumers are government companies that constantly pay the lease on time.
The difficulty GEO deals with is that the population of detainees in its facilities has actually been dropping, and that trend appears most likely to continue. That indicates minimized profits, which to financiers implies the stocks share cost might continue to drop, and also increases the likelihood that the company might cut its dividend further.
To some degree, the future revenue declines may have already been priced into the stock, but as a financier, I dont see upside for GEO Group whenever quickly.
This post represents the opinion of the author, who might disagree with the “official” suggestion position of a Motley Fool premium advisory service. Were motley! Questioning an investing thesis– even among our own– assists us all think seriously about investing and make decisions that assist us end up being smarter, better, and richer.