Please ensure Javascript is enabled for purposes of website accessibility

Why The GEO Group Stock Fell 10% at the Open on June 17

By Reuben Gregg Brewer – Jun 17, 2020 at 11:15AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Although nothing in particular happened at the real estate investment trust, one of its peers shocked Wall Street, and investors' concerns spread quickly.

What happened

Shares of real estate investment trust (REIT) The GEO Group (GEO -0.59%) were off 10% as Wall Street opened on June 17, and were still down by 8.2% roughly an hour and a half into the trading day. The thing is, nothing material appears to have changed with the corrections facility operator. Investors were instead reacting to news from its peer, CoreCivic (CXW 1.76%), that sent that stock down by 20% or so in early trading.  

So what

The big news from CoreCivic was twofold. First, it's suspending its dividend. Second, and likely more important for investors in both CoreCivic and The GEO Group, is that CoreCivic is reevaluating its corporate structure. Given that the two operate using similar business models, investors appear concerned that The GEO Group could follow CoreCivic's lead on both fronts.  

A hand drawing the words risk and reward on a scale

Image source: Getty Images

The crux of the issue is the REIT structure, which allows companies to avoid corporate-level taxation but requires them to pass at least 90% of their taxable income on to shareholders. Although that removes the issue of double taxation and leads to large payouts for investors (who must treat the dividends as regular income for tax purposes), it leaves REITs almost totally reliant on the capital markets to fund their growth investments. CoreCivic's stock has been languishing at low levels and its bond prices have been weak, too, so its cost of capital has been relatively high. This explains why it's considering dropping the REIT structure. 

The GEO Group faces similar headwinds on the capital front, so it makes sense that investors would be worried that it too may suspend its dividend and start weighing alternative corporate structures. Thus, as investors sold CoreCivic, they also sold shares of The GEO Group.

Now what

Although there's nothing at this point to suggest that The GEO Group will suspend its dividend or alter its corporate structure, shifts like the one CoreCivic is considering do often sweep through industry niches. The problem is that, until The GEO Group comments on its intentions, investors will have no indication about what its plans might be. Uncertainty is in the air for the time being, and that increases risks for income investors who count on the dividends this REIT regularly throws off.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Geo Group Stock Quote
The Geo Group
GEO
$11.82 (-0.59%) $0.07
CoreCivic, Inc. Stock Quote
CoreCivic, Inc.
CXW
$13.28 (1.76%) $0.23

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
349%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.