The GEO Group Inc (GEO), Corrections Corp of America (CXW) Crumble on DoJ Crackdown

DoJ plans to phase out use of private prisons, sending GEO and CXW down by about 40% on Thursday

Publicly traded prison stocks The GEO Group Inc (NYSE:GEO) and Corrections Corp Of America (NYSE:CXW) were off around 40% each amid a Washington Post report saying the Justice Department will phase out its use of private prisons.

Prison stocks GEO CXW

Effective immediately, DoJ officials are to either reduce or outright refuse to renew expiring contracts, according to a Thursday memo from Deputy Attorney General Sally Yates.

According to the Washington Post:

“The Justice Department’s inspector general last week released a critical report concluding that privately operated facilities incurred more safety and security incidents than those run by the federal Bureau of Prisons. The private facilities, for example, had higher rates of assaults — both by inmates on other inmates and by inmates on staff — and had eight times as many contraband cellphones confiscated each year on average, according to the report.”

Private prisons like GEO Group and Corrections Corp have long been criticized for their lack of efficacy, and in many cases, even corruption. A University of Wisconsin study, for instance, looked at Mississippi data that showed prison terms were being used to bolster private prisons’ profits. Prisoners suffered longer sentences than their publicly imprisoned peers, and were more likely to return to jail.

For the past couple of years, John Oliver has brought national attention to America’s prison issues, including private prisons. In a 2014 bit, he even pointed out how CXW “actually touted ‘high recidivism’ as a reason private prisons are a ‘unique investment opportunity.'”

GEO and CXW shares actually haven’t appreciated all that well in the past few years. GEO and CXW had appreciated 65% and 40%, respectively, prior today. That compares poorly to the S&P 500’s 80%-plus return over the same time.

However, their businesses do generate cash flows that have funded generous dividends. Both companies were able to start paying out larger, regular quarterly dividends in 2013 as they restructured to become real estate investment trusts (REITs). Before today, both GEO and CXW were yielding around 8%.

The decision does not automatically affect any state business for Geo Group and Corrections Corp. However, it’s unsure whether states will follow the DoJ’s lead.

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