As the largest incarcerator in the world, the United States is a wonderful place to own a prison contracting company. It is also apparently a great place to run a prison contracting company that is actually a REIT. Corrections Corp of America (NYSE:CXW) raised its earnings guidance for the fourth quarter and full year on Friday, along with confirmation that the company is changing its corporate structure to becoming a real estate investment trust. If you can persuade your socially conscious side to go outside and take a walk around the block, this may be a good time to pick up a company with all winds blowing its way.
For those uninitiated in the world of corrections contracting, these companies operate the majority of the United States’ famed prison system. They can do as little as provide food and hospitality (not sure if that’s the word) services to owning the land underneath the concrete. While not likely to ever come within a light-year of the World’s Most Conscious Companies list, these are incredibly lucrative businesses that have about the best possible industry environment. In addition to receiving government subsidies, these companies have access to seriously cheap labor (yes, that’s exactly what you think that means). These stocks are part real estate play, part industrial cash-printer, part hotelier (in the North Korean sense of the word).
Traditionally, companies like Corrections Corporation of America and the The GEO Group, Inc. (NYSE:GEO) have operated as your average incorporated entity. But there’s a new trend afoot as of recently — they’re switching over to REITs. What does this mean for investors? Big, fat dividends complimented by potentially decent capital appreciation. GEO already pays a chunky 6% dividend, and CCA currently pays a little over 2%. You can expect that number to rise though as the company is confirmed to attain REIT status, meaning 90% of its earnings will go out in the form of a check to shareholders.
CCA isn’t just for the income investor, either. It’s a growing company with tailwinds galore.
A seriously wide-moat business
I’m not sure if any prisons in the U.S. literally have moats, but the companies that run them sure do. These companies are deep in the cogs of the U.S. prison complex and have a very comfortable relationship with the government. It shows up on the income statement, too.
CCA bumped its fourth-quarter EPS estimates by a penny to $0.44 from $0.43. The consensus for Street estimates is $0.41. For the full year, the company is also raising its EPS estimates by a penny to $1.57.
As for 2013, the company is headed for substantial year-over-year earnings growth. For full year 2013, EPS is expected to be in the range of $2.05 to $2.15, or 24%-27% year-over-year growth. The expected annual dividend is in the range of $2.04 to $2.16, or 2%-8% more than its current payout. And, with all of the company’s government subsidies, it is looking at a GAAP income tax rate of just 8.5% to 9%.
I can’t in good conscience support the company’s business practices, nor do I think so much government funding should go toward imprisoning people, but looking at CCA purely as a stock, it is one attractive pick. Just sayin’.
Valuation
Both CCA and GEO Group are relatively expensive stocks, hovering around 20 times one-year forward earnings. But they will also be experiencing double-digit earnings growth and paying those lovely 90%-of-taxable-income earnings now that they are reorganizing as REITs. I find both stocks to have room to run in the coming year based on strong guidance and a more favorable corporate structure. If that’s incorrect, you have built-in protection with the dividend that is likely to rise in the coming years.
Prison stocks aren’t the prettiest companies to own. You don’t feel as if you’re contributing to a better America by investing in them. But similar to cigarettes, guns, oil, and natural gas, these are unfortunate truths about our nation. Until we correct (pun!) to a more reasonable developed country, I may quietly and guiltily take my piece of the pie.
The article Socially Unconscious, but Getting It REIT originally appeared on Fool.com and is written by Michael B. Lewis.
Fool contributor Michael B. Lewis has no position in any stocks mentioned. The Motley Fool recommends Corrections Corporation of America.
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