Are For-Profit Prison Stocks a Wise Investment or Ethical Hazard?

Joe Goldman |

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With 730 Americans incarcerated per 100,000 citizens, the US has the world’s highest incarceration rate by far. According to Bloomberg, more than 2.2 million Americans are currently in prison. The U.S. also leads the world in total number of prisons with 4,575, almost four times more than runner-up Russia.

The War on Drugs enables the legal system to fill prisons to capacity, despite a massive overabundance of correctional facilities. Most drugs, even marijuana, carry minimum sentences for possession. According to an FBI report, one American is arrested every 42 seconds on marijuana charges, and it is often in the best interest of the accused to plead guilty or settle in court. Consequently, more than half of federal prisoners are incarcerated on drug charges, most of whom are minorities and some of whom are innocent.

There are a handful of companies that profit from America’s incarceration system. Privately owned prisons are legal, even encouraged through government subsidies because privately owned prisons tend to save local, state, and federal governments massive amounts of money. Government-owned prisons are frequently in the red because they do not have the resources or the business expertise to efficiently own and operate correctional facilities.

As for-profit corporations, prison companies have a vested interest to take shortcuts, cut costs, and keep people in prison longer. This can result in poor care, malnutrition, overcrowding, and understaffing within correctional facilities. There is a clear conflict of interest between the capitalist structure and public service, yet for-profit prisons remain perfectly legal and incredibly profitable.

Enter GEO Group (GEO) and Corrections Corp of America (CXW). The two companies are publically traded real estate investment trusts (REITs) in the business of owning, operating, and leasing correctional facilities. In essence, they profit from mass incarceration and return a large portion of these profits to investors.

It may cross the ethical boundaries for some, but investing in these correctional facility REITs is an effective method to profit from America’s broken prison system. They trade in close correlation with one another, boast near-30% profit margins, and have provided tremendous returns over the past few years.

GEO Group (GEO)

The GEO Group is a real estate investment trust (REIT) that owns, leases, and manages correctional, detention, and re-entry facilities in the United States, Australia, South Africa, the UK, and Canada. In other words, the GEO Group is in the business of prisons – a business model that is controversial, paradoxical, and quite profitable.

GEO Group is a traditional REIT in the sense that it yields a hefty dividend, returning 6.5% per annum to investors. GEO’s share price has doubled since the beginning of 2012, returning a massive 265% adjusted for dividends. GEO distributed a giant $5.68 one-time dividend at the end of 2012, yielding almost 20% at the time. GEO most recently raised its dividend from $0.55 cents to $0.57 per quarter at the beginning of 2014.

GEO operates 98 facilities and provides 77,500 beds to inmates. With a market cap of $2.56B, this values each correctional facility at $26 million and each bed at $33,000.

Corrections Corporation of America (CXW)

Corrections Corporation of America is a REIT in the business of owning and operating privatized correctional facilities in the United States. CCA is the largest owner of partnership correction and detention facilitates. It is also the largest prison operator besides the federal government and three states. CCA owns or controls 53 correctional facilities.

CCA is a high-yielder, paying a $0.51 quarterly dividend or 6.2% annually. The REIT initiated its first dividend in 2012 and paid a $6.63 one-time dividend of at the beginning of 2013, which amassed almost 20% of the share price. The special dividend was paid in near unison with the GEO Group, a clear sign that these privatized prisons became especially profitable over the previous several years.

CCA shares have faltered over the past 12-months due to the overall underperformance of the entire REIT sector. Yet, with a 211% dividend-adjusted gain since the beginning of 2012, CCA has significantly outperformed the stock market and the entire REIT sector.

A Dirty Investment?

Talk show host John Oliver half-jokingly poked fun at the American prison system on his July 20 edition of Last Week Tonight. Oliver firmly believes that the American prison system is broken, and many lawmakers and influential authors are beginning to agree. Michelle Alexander’s The New Jim Crow has been extremely influential in exposing the War on Drugs as the cause behind mass incarceration in America.

 

 

The prison and legal system may be ripe for huge changes, doesn’t necessarily deem prison stocks an unworthy investment. As long as the War on Drugs continues and privately owned prisons remain intertwined in a twisted conflict between profits and public service, they will surely remain extremely profitable. Some investors may find the high-yield and consistency of prison stocks highly attractive, while others will stay away for ethical purpose.

Investors should keep a close eye on marijuana legalization and the 2016 presidential race, when a new candidate could potentially overhaul the entire incarceration system or opt to keep it in place. The latter will enable GEO Corp and CCA to reap positive returns for investors.

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
GEO Geo Group Inc (The) REIT 34.25 0.29 0.85 749,187
CXW Corrections Corporation of America 24.27 0.44 1.85 2,277,466
EPS.DB:PUR Epsilon Energy Ltd. 7.75% convertible unsecured su 94.83 0.00 0.00 0

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