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Geo Group Cuts The Dividend: What Now?

Apr. 08, 2021 8:00 AM ETThe GEO Group, Inc. (GEO)CXW241 Comments

Summary

  • GEO finally eliminated its dividend - sending the stock down 20%.
  • Even after the crash, the stock still is not cheap when you dig deep into the numbers.
  • I estimate that 49% of revenues are attributable to entities that are likely to significantly pare back their exposure with GEO.
  • I reiterate my sell rating.
  • Looking for a helping hand in the market? Members of Best Of Breed get exclusive ideas and guidance to navigate any climate. Learn More »

Prison guard talking to inmates
Photo by Thinkstock Images/Stockbyte via Getty Images

On April 7th, Geo Group (NYSE:GEO) announced that it was cutting its dividend. The stock subsequently fell 20%, perhaps due to yield investors fleeing a yield-less equity. In spite of the stock price correction, the future

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This article was written by

Julian Lin profile picture
30.13K Followers

Julian Lin is a financial analyst. He finds undervalued companies with secular growth that appreciate over time. His approach is to look for companies with strong balance sheets and management teams in sectors with long growth runways.

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Comments (241)

Long Time Running profile picture
You would have to be a cruel heartless bastard to invest in GEO.

whistleblower.org/...
@Long Time Running

That article doesn't even mention GEO. If you are short GEO, don't wait for $10+ to cover.
Maschuette profile picture
@Long Time Running That company is Lasalle Corrections. Not GEO. And it was an allegation. And, even if it was true, it was one person working there. Not investing in GEO because of this is like not donating to firefighters because Derek Chauvin killed George Floyd.
Jason Alberty profile picture
Hey Julian,
When they mention "book value" of real estate assets in REITS, does "book value" include the depreciation tax charges form each year? I made a career in income real estate, and every time our long term assets would sell far over book value due to the depreciation charges. Thanks!
Julian Lin profile picture
@Jason Alberty Yes, it likely includes depreciation. However - I would hesitate to assume that their assets are worth more than book value, considering the existential crisis to the business model. There would need to be substantial capital investment involved to repurpose these facilities, if at all.
Jason Alberty profile picture
@Julian Lin That is really interesting. I see your point about the business model, but holy smokes would the replacement cost of such assets (especially at todays prices) would be through the roof. Maybe I'm a bit naïve, but these facilities which I'm guessing are all steel and concrete bones which don't depreciate the way everything else does in real life/non accounting ways. I bought a couple thousand shares last week at 5.50 along with several 6 dollar May calls at 15 cents. I wish Michael Burry would make his phone calls before next Friday on this one, LOL.
kwinter$ profile picture
@Julian Lin hesitate? book value = cost less depreciation each year, LOL
They are more than likely carried at far less than market value
J
Interesting, well-thought out article. It doesn't appear though to address GEO's ability to sell assets for the purpose of debt reduction.
Julian Lin profile picture
@29Jason If GEO can sell the assets at a good price, then that'd be positive, but I'm skeptical.
Is GEO worth $16 a share?

finance.yahoo.com/...
n
@6228371 Intrinsic value based on P/FCF when the issue is that you're uncertain of business outlook?
SleepyInSeattle profile picture
@6228371 No, it is not/ Not even close.
R
The U.S. prison population is much higher than the other 195 countries of the world and will be substantially lowered in the future.
SleepyInSeattle profile picture
@Robert W Neill Jr Hopefully so.
B
@Robert W Neill Jr That's because the US has more criminals
I believe that Geo will have to examine their assets to determine if the assets will need to be written down. I believe current accounting principles require companies to assess it the future cash flow will exceed the value of the assets. If future cash flow does not, I believe Geo will be required to write down assets.

Since they have lost contracts related to the Bureau of Prisons and will lose other contracts, the cash flow from governments will indicate an asset impairment of the vacated properties. An analysis by Geo may have already been started and been a contributor to ending the dividend.
@48190435

"I believe that Geo will have to examine their assets to determine if the assets will need to be written down. I believe current accounting principles require companies to assess it the future cash flow will exceed the value of the assets. If future cash flow does not, I believe Geo will be required to write down assets."

LOL! Some assets might have a resale value much greater than the book value. Depreciation has been taken for years on the assets, so the book value of some assets may be well below their resale value.
G
@48190435 "I believe current accounting principles require companies to assess it the future cash flow will exceed the value of the assets." Mark to market means market value of the asset, not a relationship to cash flow.
Julian Lin profile picture
@48190435 Asset impairments may follow, yes
d
Where is ICE and other government entities going to put all of the illegal border crossers?GEO will have unused space they can turn into 3 star hotels. Lot of homeless need shelter too.
B
@dennis rfm They are putting many of them into hotels, at huge expense:

nypost.com/...
just-another-newbie profile picture
An interesting point of view if you have time to read ...
www.washingtonpost.com/...
kwinter$ profile picture
@just-another-newbie its subscription
B
@just-another-newbie Thanks for posting. Interesting take and not a normal viewpoint for sure. 15% of 11% is a small number!
n
The left wants to cram everyone into small spaces to decrease society's carbon footprint. GEO should just market repurposing their facilities as required housing for essentially all of society to save the planet. That will garner complete support of GEO by the left powers that be. Of course, they will need to live elsewhere because they will need to be freely moving about to organize such saving of the planet.
B
@nighthawk100 And they can put a windmill on top of each "Diversity Hotel"
n
@One Nut McGraw And one composting toilet for the entirety of each hotel.
Dividend Pro profile picture
GEO a bad investment?
But surely you jest! You must be wrong, this can not be.

Because Rida Morwa said this was a great investment just 3 months ago. And it provided a 11% yield.

Surely he was right, as he always is? (sarcasm)
F
@Dividend Pro I have the feeling that this service draws a list of high dividend paying stocks, throws a dart and then write an article.
craftbrewinfo profile picture
@Dividend Pro
Well was it a “table pounding “ buy or one you are “investing half your net worth in” ????
That’s why it’s important to do ones own analysis and make ones own decisions. I too get turned off by a lot of these shady buy write ups
l
@Dividend Pro Say it ain't so!
u
Thank you for thoughts and info.
John Curti profile picture
Counties, states, and the US government have prison facilities that are aging and will need to be replaced. Prison reits need to get out of the business of running some of their facilities and concentrate on leasing and/or selling their facilities to government agencies. Yes, demand will decline over time but outdated facilities will still need to be replaced.
Both companies will likely survive but people buying these stocks need to realize they are not investing but speculating.
kwinter$ profile picture
@John Curti tend to disagree, perhaps populations wane some as they have but long term the populations isn't shrinking and people as a whole aren't becoming less criminal
J
@kwinter$ Sadly, you are correct about the state of the population. Our current friends in DC seem to prefer catch and release, if they have to go through the inconvenience of catch. I suspect as crime rises the population may begin to take on the responsibility of crime control on their own and that will further reduce the need for prisons.
G
@JasonT5001 "I suspect as crime rises the population may begin to take on the responsibility of crime control on their own" And thereby adding to the crime wave.
G
I follow this author to some extent and most of his articles (ones I have read) are usually bearish. I like to see both sides of a coin. But there are other authors with different opinions, so you really need to read those too and then form your own opinion. The last article of his that I read was about USAC, he was bearish. USAC has been doing quite well lately, think before you jump ship.
Julian Lin profile picture
@GreenguyMN I've never written about USAC..
s
Too late to sell. Moved holdings to my ROTH were it can sit for the future. Just look who cut their contract. NYC, going to hell in a hand basket. Their's ( and other lib cities ) passing out get out of jail free cards wouldn't last forever. If it goes to $3 in the next market down turn I'll dollar cost in. They're more than just a prison cell. They help rebuild lives, enables seconds chances. Between divs. and trading profits GEO doesn't owe me a thing. I won't kick them will their down. Long hold.
Mghaynes profile picture
@srmcharts "Kick them while they're down?" Holding onto your investment only affects you; they won't care one way or the other. So sell if it makes sense, buy if it makes sense, but try and remove emotion from the decision.
c
ctxp
09 Apr. 2021
The bonds went up after the dividend was cut. Good deal for bond holders
Julian Lin profile picture
@ctxp It definitely is good news, though I'm wary of the risk-reward of the bonds at this time
Herding Value profile picture
@Julian Lin Knee-jerk reaction because there's more money to service the debt. If you are older and need to preserve capital, stay very far away.
earlyriser profile picture
@ctxp , that's why I own bonds in both GEO and CXW. However, I am watching the stocks for a near term bottom. CXW is my first choice. The future of both stocks comes down to their ability to reduce debt. If they are successful, they are big winners. If, in a couple of years, they can reduce debt enough, they can buy shares in a big way. Both stocks could triple. Bonds are still the safer way to go.
n
How easy is it to repurpose the building to a different use? E.g. enclosed mall, multi family, office or hotel? Well i am not an expert, but i think you cannot.
@nlbbetc

"How easy is it to repurpose the building to a different use? E.g. enclosed mall, multi family, office or hotel? Well i am not an expert, but i think you cannot."

Perhaps some prisons can be converted to college campuses? I have heard some students say that their dorm room is the size of a prison cell. 8)
kwinter$ profile picture
@nlbbetc not easy or cheap, the issue would be the rents you can demand, in most prison locations I would assume you couldn't demand high enough rents to get a return for the investment
NBR Market Monitor Monitor profile picture
Shares Short (Mar 15, 2021) 4 33.44M
Short Ratio (Mar 15, 2021) 4 5.84
Short % of Float (Mar 15, 2021) 4 42.53%
Short % of Shares Outstanding (Mar 15, 2021) 4 27.49%
Shares Short (prior month Feb 12, 2021) 4 24.05M

Heading for squeeze range..
Julian Lin profile picture
@NBR Market Monitor Monitor Short squeeze is not a great investment thesis.
NBR Market Monitor Monitor profile picture
@Julian Lin No kidding. It was just an observation.
n
I always thought prisons are in "demand", so you need even more. Where are the inmates going to stay if the contract is not renewed?
And i think ICE doesnt own any prisons. There have to rent/ outsource prisons.
kwinter$ profile picture
@nlbbetc precisely
J
what price would you buy GEO?
Julian Lin profile picture
@JackieDan Right now there is no price
wildpitcher profile picture
This should not have been a surprise to anyone. It is the natural consequence of making an investment that is dependent on the outcome of elections.

The trend is your friend. The trend is away from "for profit" prisons. This is not going to end well for people who try to hold on.

Dave
@wildpitcher

"This is not going to end well for people who try to hold on."

This is not going to end well for the shorts who try to hold on. Will GEO be the next GME? How many shorts forgot to cover?
kwinter$ profile picture
@wildpitcher away from "for profit" prisons to?
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