This high yielding dividend stock could be in trouble

Real estate investment trusts (REITs) are known for their high yield dividends, and The GEO group (NYSE: GEO) is no exception. The company, which owns and operates 123 private secure and post-correctional facilities with 93,000 total beds in the United States, Australia, Africa and the United Kingdom, is offering a dividend with an annualized payout of $ 1 per share. At the company’s current share price, this gives it a return of around 12.6%.

It might sound awesome … until you find out why the return is so high. GEO Group’s share price fell more than 32% last year, so despite the payout cuts this year and last year, the yield remains high. I’m not that worried about the security of GEO’s dividend, but the company appears to be a classic dividend trap because its earnings are trending down.

IMAGE SOURCE: GETTY IMAGES

The hits keep coming

The past year has been difficult for companies operating private prisons. The COVID-19 pandemic has brought additional costs to making prisons and immigration detention centers safer for workers, inmates and inmates. This has also resulted in a decline in inmate populations.

According to The Marshall Project, the number of people incarcerated in the United States rose from 1.3 million in March to 1.2 million in June. Prisons, in an effort to avoid introducing the coronavirus into their populations, have stopped accepting new prisoners. Court closures meant fewer people were convicted, and parole officers were less active and sent fewer people back to jail for parole violations.

On top of that, with the change of government in Washington, now is not the best time to be in the private prison business. On January 26, President Biden signed an executive order directing the Justice Department not to renew its contracts with private prison operators.

The ordinance applies to all private facilities associated with the Bureau of Prisons and the US Marshals Service. This does not yet apply to all agencies. Immigration and Customs Enforcement, for example, has contracts with private companies, including the GEO group, to detain undocumented immigrants.

Looking at a recent presentation to the company’s investors, it’s easy to see that the end result of Biden’s policy could be a 27% cut in GEO Group revenue.

IMAGE SOURCE: The Geo Group

Even before the decree, the Prisons Office chose not to renew its contracts with three GEO establishments; these contracts expire this quarter. The company said the Prisons Bureau’s remaining contracts may also not be renewed as they arise.

In March, GEO learned that the Marshals Department would not be renewing its contract for the company’s 222-bed Queens Detention Center in New York City. The facility generated annual revenue of $ 19 million, the company said.

The dividend can be certain, but the share price not so much

You have to give GEO credit for doing the smart thing, cutting its quarterly dividend from 29.2% to 34 cents a share last year, then 26.5% to 25 cents a share this year.

While the cuts are concerning, the dividend appears to be well covered by the company’s expected adjusted operating funds this year, which management believes are expected to be between $ 1.98 per share and $ 2.08 per share.

The company’s 2020 revenue of $ 2.35 billion was down from the $ 2.47 billion it reported for 2019, and net profit of $ 113 million was down from to $ 166 million the year before. In the fourth quarter, its revenue of $ 578.1 million was a 7% year-over-year decline. It was also the fourth consecutive quarter of sales decline.

REITs are best analyzed based on their FFOs, and these parameters have also decreased for GEO Group. The company reported an annual normalized FFO of $ 229.3 million, up from $ 260.7 million in 2019; The adjusted FFO was $ 300.6 million, up from $ 328.4 million in 2019. GEO’s adjusted FFO last year was at its lowest level since 2016.

GEO Group fights against trends

Unlike some REITs that were negatively affected during the global pandemic by tenants who had difficulty paying rent, GEO’s clients are government agencies that always pay rent on time.

The problem facing GEO is that the inmate population in its facilities has declined, and this trend appears likely to continue. This means reduced income, which for investors means that the stock price could continue to fall, and also increases the likelihood that the company may further reduce its dividend.

To some extent, future revenue declines may have already factored into the stock, but as an investor, I don’t see a benefit for GEO Group any time soon.