Sector Security, Juicy Dividend Yield Make Corrections Corp. (CXW) One to Watch - Barron's

June 25, 2012 10:37 AM EDT
Shares of Corrections Corp. of America (NYSE: CXW) are trading notably higher Monday morning following a bullish outlook from Barron's over the weekend. The move higher comes as the broader equity market is trading sharply lower.

CCA gets 45 percent of its revs from the Federal government -- certainly a secure source -- and is a leader in the private corrections industry which has high barriers to entry, good customer credit, and resistance to recession. CCA would still be able to gain should the prison population dwindle due to several cost advantages private companies have over public ones. Barron's estimated only 10 percent of the $74 billion spent annually on prisons goes to private companies.

CCA says average cost per prisoner per day is about $67.08, over 20 percent lower than the federal rate of $85 at he Federal Bureau of Prisons and 52 percent less than California's $140 a day. Key benefits for CCA include: building prisons in areas with low housing costs, easier benefits than those of the federal system, and facilities which require less manpower than traditional setups.

Advantages for the company also eventually translate into benefits for states: the company is buying facilities from cash-strapped states which meet only certain criteria like 1,000 beds, 25 years old or newer, and 90 percent occupancy rate.

More than just expansion, CCA will see near-term benefits as the company switches its structure to a REIT. Should that happen, CCA could find its stock price in the $49 to $54 range. The move would allow CCA to cut taxes by about $75 million, as well as triple its payout to shareholders, as REITs are required to pass 90 percent of taxable income to shareholders.

Shares under GAAP currently go for 17 times this year's EPS expectations. Taking an adjusted FFO metric used by the company, which works back in non-cash charges for facility depreciation less capital expenditures for facility maintenance, and the stock is at a more modest P/E ratio of 12.1 times.

Nothing about the REIT conversion is set in stone and CCA didn't discuss any detail or plans to Barron's.

CCA's 80 cents-per-share payout which currently yields 3 percent should help keep investors patient. In a world where crime doesn't pay, CCA is one stock that breaks the rules.

Shares are up about 0.5 percent Monday.

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