This ‘Hated’ 6%-Yielder Is Hitting New Highs

Investors love “sexy” investments.

Green energy, IoT technology and trendy retailers tend to catch the eye more than say, a waste management company or a utility. In practice, however, dividend paying stocks in non-cyclical industries can outpace even so-called high-growth stocks.

The private prison industry might not be “sexy,” some would argue it’s hated, but investors should pay attention.

#-ad_banner-#​Overcrowding is a huge problem that the prison system hasn’t been able to keep up with. On a federal level, prisons operate at 136% capacity while some states report even higher figures – California operates at 145%.

This is due to a drastic increase in people in jail. In the United States, there are approximately two million incarcerated citizens. In 1972, the prison population was around 300,000 — a staggering 567% increase in 42 years. And many facilities are run down, over 100 years old and requiring major renovations.​

Just ten years ago, there were only five private prisons in operation in the United States and now there are well over 100. Still, private prisons account for just 10% of a $74 billion market, allowing plenty of space for growth.

The GEO Group, Inc. (NYSE: GEO) is the largest private prison provider in the world with 98 facilities throughout the United States, Britain, Australia and South Africa. It trades as a real estate investment trust (REIT), and engages in the design, upkeep and management of correctional facilities.

The structure of GEO as a REIT means that the company must distribute at least 90% of its income to shareholders, resulting in larger-than-average dividend yields. At 6.1%, the stock offers a yield more than 2.5 times greater than the 10-year yield on treasuries.

The stock climbed 22% year-to-date and recently broke a 52-week high. The company beat earnings for the last three quarters by an average of 20% — this kind of momentum suggests a strong outlook for the stock.

The publicly traded private prison industry is virtually a duopoly between GEO and Corrections Corporation of America (NYSE: CXW). While the latter is likely to take advantage of prison growth demand, it lags its smaller competitor on the fundamentals.

Its 5.7% dividend yield is smaller than GEO’s. CXW expects 12% earnings per share growth, compared to GEO’s 15%. In addition, it looks as if Corrections Corp. is slowing down given its 18.8% growth over the past five years, while GEO is on the way up with the past five years averaging 6.6%. And an important edge is GEO’s international exposure.

Risks to Consider: The prison industry is subject to strong government regulation and controversies which could hurt shareholders. In addition, the industry is reliant on arrests by law enforcement. A drop in arrest rates directly correlate with a drop in occupancy rates.

Action to take–> GEO’s stock has risen sharply following the company’s latest earnings report and appears somewhat overbought based on its relative strength index of 68 — a measure of a stocks momentum. Investors should wait for a pullback before purchasing shares. Based on its long term EPS growth rate and 6% dividend yield, the stock looks fairly valued at $45 – a 20% discount from current price levels.

If GEO’s 6.1% yield is intriguing, then my colleague, Nathan Slaughter, has the newsletter for you. High-Yield Investing is dedicated to finding the most stable, profitable stocks that offer dividend payments. He recently found a private, dividend-rich market where Hilary and Bill Clinton made more than $15 million — and now it’s open to the public. Get all the details here, including a backdoor play that yields 12%.