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Why Shares of The GEO Group Rallied as Much as 11% This Morning

By Reuben Gregg Brewer – May 10, 2021 at 12:38PM

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The prison operator reported earnings, which actually weren't as bad as expected. But there's still a lot going on here.

What happened

Shares of The GEO Group (GEO -2.09%), a publicly traded owner and operator of prisons, rose a pleasing 11% or so in early trading on Monday. That gain had been pared to roughly 8% by 11:45 a.m. EDT, but the enthusiasm today is actually a notable change in direction. The company's first-quarter 2021 earnings update precipitated the positive price action.  

So what

Over the past year, The GEO Group's stock price has fallen by almost 50%. The quarterly dividend has gone from $0.48 per share to zero. That's not a great trend for a real estate investment trust (REIT) like The GEO Group, and it highlights the very real headwinds facing the company today.

One of the biggest, and hardest to quantify, is that the current administration in Washington, D.C., has taken a dim view of for-profit prison operators (ordering the U.S. Department of Justice to stop using companies like The GEO Group). To be fair, the federal government is only a portion of the REIT's business, but this move could bleed into other levels of government.  

The acronym REIT on a binder with the words real estate investment trust below it.

Image source: Getty Images.

That said, at this point, The GEO Group is focused on managing its exposure to the coronavirus pandemic (a material issue for group settings like prisons) and reducing debt. That latter goal helps explain the dividend cut and dovetails with the company's current reevaluation of its decision to operate as a REIT.

Interestingly, however, The GEO Group posted first-quarter 2021 adjusted funds from operations of $0.60 per share. That would have been more than enough to cover the dividend before it was cut and then eliminated. The figure also handily beat Wall Street expectations of $0.48 per share and was up from $0.55 per share in the same period of 2020. So, despite the headwinds here, it wasn't a bad quarter. And it's worth noting that, if The GEO Group decides to remain a REIT, it may be required to pay a dividend at the end of the year so it can retain the tax-favored REIT status.   

Now what

It's easy to see why investors were pleased with the results here today. However, that doesn't change the very complex backdrop facing investors, including negative sentiment out of Washington, the coronavirus pandemic, and the company considering shifting away from REIT status. Until there's more clarity on these issues, investors might want to watch from the sidelines. And yet, after such a material price drop over the last 12 months, more-aggressive investors wouldn't be wrong to wonder if there's worthwhile recovery potential here.

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.

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