By Tedra DeSue
Corrections Corporation of America (NYSE:CXW) has been on quite a tear over the past year and it went ex-dividend on April 1. Given this, I thought it would be interesting to explore the attractiveness of this company, which operates in a space that has drawn public outcries, but has made for a great investment opportunity.
Corrections Corporation of America (CCA) owns and operates privatized correctional and detention facilities. It is the largest publicly traded company in this business that has flourished over the years as governments shift the burden of operating prisons and jails to private companies. The onus of funding the construction of prisons has traditionally fallen on state and local governments. However, budget constraints and the sheer amount of resources that must be dedicated to operating the facilities have led to many of them turning to private companies.
Depending on whom you ask, this is viewed as a good idea or a very bad idea. From an investor's standpoint, however, these companies that are publicly traded are attractive because of the hefty dividends they offer.
CCA pays a $2.12 dividend, yielding 5.5%. As I noted above, CCA traded ex-dividend for its quarterly dividend of $.53 on April 1 and it is payable to shareholders of record on April 15. The ex-dividend date is the day on which the stock will trade without the dividend. As explained by options site Born to Sell, a stock's ex-dividend date is the first day the stock trades without the dividend. In order to receive the dividend you must own the stock by the close of market on the day before the ex-dividend date.
The Motley Fool notes that if you are selling shares and want to receive the dividend, you should sell on or after this date. On the other hand, if you are buying shares, you must buy before this date to receive the dividend.
To get an idea of how the dividend is determined I turned to OptionsMonster. At the time of writing, CCA was trading at $38.51 a share. According to OptionsMonster, as a percentage of this price, the dividend would work out to be about 1.38%.
Looking beyond this ex-dividend date, investors should be aware of some of the headwinds that may impact CCA's pricing. For example, Fitch Ratings recently highlighted concerns about the concentration of the company's customers. The rating agency took issue with the uncertainty regarding one of CCA's clients - the California Department of Corrections and Rehabilitation (CDCR). The department makes up 12% of CCA's total revenue for 2012, according to Fitch, so any tinkering with it could affect CCA's revenues.
Other companies that make up CCA's peer group are also seeing their revenues coming under pressure due to declines in prison populations. As far as other publicly traded companies operating in this space are concerned, CCA's largest competitor is The Geo Group (NYSE:GEO). A much smaller player in the space is Avalon Correctional Services (OTCPK:CITY). All of them are facing possible declines in their revenues due to several issues. Fitch noted specifically that California is in the process of implementing changes to its proposed corrections realignment program.
Here's making sense
While trading at a price-to-earnings ratio of 24, this stock is not cheap. What's more, it more than doubles the industry average P/E of 56, according to Yahoo Finance. But with operating margins that is 6-times the industry average, the company is raking in plenty of cash.
However, though, at $37.56 per share, the stock is trading at just 17-times fiscal 2013 estimates and 18-times estimates for fiscal 2014, which is in line with the company's historical average. A case can be made that the stock is fairly valued, which means unless the crime rate drops drastically, CCA investors can still make a killing here - in a manner of speaking.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: SaintsSense is a team of financial writers. This article was written by Tedra DeSue, one of our market analysts. It was originally published on our site and has been submitted to Seeking Alpha as non-premium. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article.