Currently priced at $11.23, Geo Group stock (NYSE:GEO) has surged by about 60% from its September lows of ~$7.00. The company, owning and managing 91 secure and reentry facilities, has navigated persistent challenges, including investor reluctance towards private prisons and a heavily leveraged balance sheet during rising interest rates. Yet, recent successful efforts in reducing debt have shifted investor sentiment. In fact, I believe that GEO is now positioned to resume its dividend. Hence, remain bullish on the stock.
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A Short History of GEO Stock and My Ratings
In 2021, Geo Group underwent a significant transformation, transitioning from a Real Estate Investment Trust (REIT) to a C-Corporation. This strategic shift was driven by a clear imperative – the company needed to redirect its financial resources from distributing substantial dividends, characteristic of its real estate trust structure, towards mitigating debt obligations. The decision was not optional but rather a necessity.
Facing a challenging financial landscape, particularly with major banks signaling a reluctance to extend loans to private prison operators around that period, GEO had limited options. In light of this, the company aimed to finance its future capital expenditures and expansion through its internal cash flows. The landscape became more daunting as major banks disengaged from supporting the firm, making future refinancing endeavors exceptionally arduous.
Consequently, GEO found itself compelled to initiate the process of debt reduction. Suspending dividend payments emerged as the most prudent choice, allowing for an accelerated deleveraging strategy.
This decision, however, dealt a significant blow to income-oriented investors, given that GEO had been a prominent high-yield stock, consistently offering double-digit yields. In response to the shift in strategy, income-focused investors began divesting their holdings, setting off a trend that persisted in the subsequent years.
Reflected in my historical assessments, I took a bearish stance on the stock in 2020 due to concerns about the safety of GEO’s dividend. This foresight anticipated the turmoil among income-oriented investors that ultimately transpired.
With few catalysts to fuel a rebound, GEO stock remained at depressed levels for quite some time. That said, the company’s underlying mission was showing positive signs. The dividend cut indeed allowed for rapid deleveraging, which Wall Street seemed to completely dismiss.
In fact, with GEO gradually fixing its balance sheet against the stagnated stock price, shares started to become increasingly attractive. Hence, I adopted a bullish view this past year. In my latest GEO article in July, I suggested that GEO stock is poised for significant upside, trading at multi-decade lows. Thankfully, I was proven right, with shares skyrocketing since. Despite the notable rally, prospects for further upside remain. This is due to GEO’s rapid deleveraging, which will possibly allow for the dividend to return.
Rapid Deleveraging to Resume Dividend
In my view, GEO’s rapid deleveraging will likely encourage management to resume the dividend, which should sustain the stock’s bullish momentum. For context, GEO’s total debt has declined from $3.1 billion at the end of Q2 2021 to $1.96 billion at the end of Q3 2023. In the meantime, the company’s total debt / EBITDA has declined from 6.9X to a much healthier 3.6X.
GEO’s current annualized debt pay-down rate is about $800 million ($676.1 million in the past nine months). Thus, it’s quite likely that total debt / EBITDA will tread toward 2X next year, likely prompting management to reinstate the dividend. At that point, the company should be comfortable with modestly reducing debt repayments and diverting this cash to start rewarding shareholders.
During the latest earnings call, management disclosed that potential lenders have expressed interest in refinancing the company’s debt at favorable rates, marking another positive catalyst for resuming dividends. Notably, management hinted at exploring options to return capital to shareholders once further enhancements in the credit profile are achieved, reinforcing the likelihood of dividend reinstatement.
Is GEO Stock a Buy, According to Analysts?
Looking at Wall Street’s sentiment on the stock, GEO currently boasts a Strong Buy consensus rating based on three Buys. At $14.33, the average GEO stock forecast implies 27.6% upside potential despite the stock’s prolonged rally in recent months.
If you’re wondering which analyst you should listen to if you want to buy and sell GEO stock, the most accurate analyst covering the stock (on a one-year timeframe) is Joe Gomes, representing Noble Financial. His track record is robust, with an average return of 11.67% per rating and a 63% success rate. Click on the image below to learn more.
The Takeaway
Geo Group’s shift from a REIT to a C-Corporation, driven by the need to reduce debt obligations, initially led to a challenging period for the stock. However, the company’s relentless focus on rapid deleveraging has significantly improved its financial position.
With total debt decreasing and the debt/EBITDA ratio becoming healthier, GEO now appears well-positioned to resume its dividend in the near term, potentially marking a turning point for the stock. I believe that a dividend resumption will prompt many investors to flock back to the stock, sustaining the ongoing bullish sentiment.
