Prisons for Profit: Don't Hope for a Breakout

The path to growth in this business, however is not always straight. While the company signed new agreements last month with Idaho, and renewed an agreement with Oklahoma, California is reducing its use of private facilities, and intends to end its agreement with the company by 2016.

The bigger news, however, was the May announcement that the company is exploring conversion to the REIT structure again. This time around, Corrections Corp. is doing its homework on the notion of converting into a taxable REIT subsidiary, which would allow the company to remain as a single entity and not be divided into a REIT and an operating company. While no final decision has been made, management has stated that a conversion could happen as quickly as January of next year. If that's the way they end up going, I hope the result is better than the late 1990's debacle.

In June, Corrections Corp. initiated a 20-cent quarterly dividend, which puts the indicated yield at a healthy 2.6%. That is a positive in my view, and signals some confidence in the business by management. The assumption would be a higher dividend in the event the company actually coverts to a REIT, but that remains to be seen.

Just how profitable is the corrections business? The company has averaged a 9.5% net profit margin over the past five years. Some may find profit margins generated through incarceration distasteful. But in an era of budget austerity, states with fiscal woes may have no choice but to look to the private sector.

In the world of publicly traded equities, it does not get much stranger than for-profit prisons. But did I tell you the one about the publicly traded funeral home chain, or the little company that converts fish into vitamin supplements? I'll save those for another day.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

At the time of publication, Heller was long XXXX.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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