Avoid Corrections Corporation Of America, Buy Omega Healthcare Investors For Income

| About: Corrections Corporation (CXW)

Summary

Corrections Corporation of America's total return greatly underperformed the DOW average for the 39.5 month test period by - 32.28%.

Corrections Corporation of America's FFO for the last quarter was $0.63 and paid a dividend of $0.54/quarter.

Corrections Corporation of America's CAGR for the last three years was 1.3%.

This article is about Corrections Corporation of America (NYSE:CXW) and why it's a poor investment over the last 39.5-month test period that's being reviewed by The Good Business Portfolio. Corrections Corporation of America is a real estate investment trust (REIT). The Company is engaged in owning, operating and managing prisons and other correctional facilities. Fundamentals of Corrections Corporation of America will be reviewed in the following topics below The Good Business Portfolio Guidelines, Total Return, and Yearly Dividend, Last Quarter's Earnings, Company Business Overview, and Takeaways and Recent Portfolio Changes.

Good Business Portfolio Guidelines

Corrections Corporation of America passes 6 of 10 Good Business Portfolio Guidelines, a very poor rating. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article "The Good Business Portfolio: All 24 Positions." These guidelines provide me with a balanced portfolio of income, defensive, momentum, and growing companies that keeps me ahead of the Dow average.

Corrections Corporation of America is a mid-cap company with a capitalization of $3.7 Billion. The relative large size of Corrections Corporation of America in this specialty REIT gives it the ability to increase the business going forward by expansion and purchase of smaller facilities.

Corrections Corporation of America has a dividend yield of 6.80% which is about average for a good REIT. Corrections Corporation of America is therefore a choice for the income investor, except that the long-term (39.5 months) total return is just 4.32% well below the DOW baseline of 36.6%. The average payout ratio is high at 129% over the past five years. Recently, the last quarter had an FFO that was higher than the dividend indicating the fundamentals may be turning up.

Corrections Corporation of America's cash on hand is good at $63.50 million allowing it buy small add-on facilities for average growth and business expansion.

I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% capital gain in addition for a yearly distribution of 5%. Corrections Corporation of America has a three-year CAGR of 1.3% well below my overall requirement. This makes Corrections Corporation of America an Avoid for The Good Business Portfolio.

Corrections Corporation of America's S&P Capital IQ has a five-star rating or strong buy. It has an average PE of 17.7 making Corrections Corporation of America fairly priced at present.

Total Return and Yearly Dividend

The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of The Good Business Portfolio. Corrections Corporation of America had a total return well below the Dow baseline in my 39.5-month test period. I chose the 39.5-month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014, the small loss year of 2015 and the slightly positive year of 2016 YTD to see how the company does in good and bad markets. I have had comments about why I do not compare the total return to the S&P 500 average. I use the Dow average because the Good Business Portfolio has six Dow companies in it and is weighted more to the Dow average than the S&P 500. Modeling the Dow average is not an objective of the portfolio but just happened by using the 10 guidelines as a filter for company selection. The dividend is average for a REIT at 6.80% and has been increased 6% year over year. The large underperforming total return makes Corrections Corporation of America an avoid for the long-term investor that wants stability. You could do just about the same total return by putting your money in a bank at 1.25%/year.

DOW's 39.5-month total return baseline is 36.6%.

Company Name

39.5 Month total return

Difference from DOW baseline

Yearly Dividend percentage

Corrections Corporation of America

4.32%

-32.28%

6.80%

Click to enlarge

Last Quarter's Earnings

For the last quarter, Corrections Corporation of America reported FFO on February 2, 2016, that beat expected at $0.63 compared to last year at $0.67 and expected at $0.59. Revenue increased 5.8% year over year for a total revenue of $448 Million. This was a good report showing the result of the improving new add-on companies that were bought during the year. FFO for the next quarter will be released on May 4, 2016, and are expected to be at $0.58. At the fourth quarter 2015 earnings call, management guided forward for 2016 at an FFO of $2.54 - $2.62 for the year. This is a good sign that they are projecting to earning enough to cover their present dividend.

Company Business Overview

Corrections Corporation of America is a real estate investment trust. The Company is engaged in owning, operating, and managing prisons and other correctional facilities, and providing residential, community re-entry, and prisoner transportation services for governmental agencies. In addition to providing fundamental residential services, the Company's facilities offer a variety of rehabilitation and educational programs, including basic education, faith-based services, life skills and employment training, and substance abuse treatment. It also provides or makes available to offenders certain healthcare (including medical, dental and mental health services), food services, and work and recreational programs. The Company's customers consist of federal, state, and local correctional and detention authorities. The Company also provides transportation services to governmental agencies through its wholly-owned TRS, TransCor America, LLC (TransCor). Corrections Corporation of America has been adding capacity throughout 2015 and the last earnings report was good. Corrections Corporation of America will be watched to see if the business is still improving for the next two quarters.

Takeaways and Recent Portfolio Changes

Corrections Corporation of America is an Avoid for The Good Business Portfolio. Corrections Corporation of America's poor performance in total return over the 39.5-month test period make it an avoid company at present. Recent earnings in the short-term make it a possibility after it shows steady results in the next two quarters. Right now, Corrections Corporation of America is too risky for a retirement portfolio.

The Good Business Portfolio has one REIT in it, Omega Healthcare Investors (NYSE:OHI) which has a growing business and 7.2% growth/year of the dividend. If you don't already have a position in the skilled nursing care REIT sector, OHI may be worth a position for your income segment of your portfolio. OHI is 3.7% of The Good Business Portfolio and I was looking for another REIT in a different specialty business like OHI's skilled nursing care and did not find it in Corrections Corporation of America. OHI has a total return of over-performance of 27.9% for the 39.5-month test period. Please see my recent article on OHI in my list of previous articles, if you have an interest.

Bought some more Omega Healthcare Investors, now at 3.7% of The Good Business Portfolio. I intend to keep adding to OHI until its 4% of the portfolio a full position and watch it grow. The dividends are being reinvested in shares of OHI. OHI just increased their dividend by $0.01/quarter or 1.8% for a yearly increase of 7.2% if these quarterly increases continue. From the last earnings report, OHI has an FFO of $0.72 giving it the ability to increase the dividend for many quarters to come.

Sold position of Novartis (NYSE:NVS), their growth and projections going forward do not look promising. Danaher Corp. (NYSE:DHR) has replaced NVS in The Good Business Portfolio.

Started a small position in Hormel Foods Corporation (NYSE:HRL) at 0.3% and will see what the next quarter brings before increasing the position.

Started a small position in Danaher Corp. at 0.4% and will see what the next quarter brings before increasing the position.

The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Home Depot (NYSE:HD) is 8.4% of portfolio, Johnson & Johnson (NYSE:JNJ) is 8.7% of the portfolio, Altria Group, Inc.(NYSE:MO) is 7.2% of the portfolio, Boeing (NYSE:BA) is 7.9% of the portfolio and L Brands (NYSE:LB) is 6.1% of the portfolio, therefore HD and JNJ are now in trim position with Altria Group Inc., L Brands Inc., and Boeing getting close. Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the fourth quarter 2015 earnings call.

For the total Good Business Portfolio, see my recent article on 2015 fourth-quarter performance for the complete portfolio list and performance. Become a follower and you will get each quarter's performance after the earnings season is over.

I have written individual articles on CAB, JNJ, EOS, LB, GE, IR, MO, BA, ADP, DHR, Omega Health Investors and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.

Of course, this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.

Disclosure: I am/we are long BA, HD, JNJ, LB, MO, OHI, ADP, HRL, DHR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.