Ares Capital Stock: 9.7%-Yielding Alternative Bank Reported Another Strong Quarter
December 6, 2023
Why ARCC Stock Has Been Able to Pay Stable, Rising Dividends
The Federal Reserve may have paused its unprecedented interest rate hikes, but the federal funds rate remains in the range of 5.25% to 5.5%, its highest level in nearly 20 years.
This has been a boon for nonbank direct lending business development companies (BDCs) like Ares Capital Corporation (NYSE:ARCC).
BDCs like Ares Capital are a great way for everyday investors to partake in the world of private equity and emerging small and medium-sized businesses. Better still, with BDCs, investors can be on the receiving end of pretty big dividends, which can pay annualized yields from six percent to more than 16%.
The largest publicly traded BDC in the U.S., Ares Capital Corporation focuses on providing direct loans and other corporate investments to private middle-market companies.
About 66% of its portfolio consists of senior secured loans. The BDC also invests in a senior direct lending program (six percent) and, to a lesser extent, equity investments. (Source: “Third Quarter 2023 Tear Sheet” Ares Capital Corporation, November 10, 2023.)
Ares Capital doesn’t invest in just any company; it focuses on defensively positioned companies in less-cyclical industries. The BDC originates investments in market-leading companies that have a history of stable cash flows, proven competitive advantages, and experienced management teams.
Ares Capital Corporation’s portfolio comprises investments in 490 companies. The top industries in the portfolio include software and services (23%), health-care services (11%), commercial and professional services (10%), and insurance services (five percent).
The BDC’s diverse portfolio has significant downside protection; the average position represents just 0.2% of the portfolio, with the largest investment being about two percent.
Since its inception in 2004, the company has achieved a net realized gain rate of 0.9%. As of September 30, its portfolio had a fair value of roughly $21.9 billion.
Ares Capital Corporation’s Q3 Core Earnings Per Share Up 18%
Ares Capital has been enjoying a wonderful year of financial growth.
For the third quarter, the company announced that its core earnings per share increased by 18% year-over-year to $0.59 per share. (Source: “Ares Capital Corporation Announces September 30, 2023 Financial Results,” Ares Capital Corporation, October 24, 2023.)
Its net income jumped in the third quarter by 380% to $500.0 million, or $0.89 per share. Its net investment income went up slightly to $289.0 million, or $0.52 per share, from $288.0 million in the same period last year.
Commenting on the results, Kipp deVeer, Ares Capital Corporation’s CEO, said, “Our strong performance continued into the third quarter with year-over-year growth in both our [generally accepted accounting principles] and Core earnings per share primarily reflecting the benefits of higher rates and continued stable credit quality.” (Source: Ibid.)
Penni Roll, the company’s CFO, added, “During the third quarter, we raised more than $800 million of new capital, including the issuance of unsecured notes, further strengthening our liquidity profile.” (Source: Ibid.)
Roll continued, “Our balance sheet remains a source of strength with ample liquidity and low leverage at 1.03x net debt to equity, which we believe positions us well to capitalize on our distinct investing advantages in today’s market.”
Management Declared Q4 Dividend of $0.48 Per Share
As a BDC, Ares Capital Corporation is good at making money—and it shares the wealth with its shareholders.
Thanks to the company’s high core earnings growth, Ares Capital stock has been able to reward buy-and-hold investors with significant dividend growth and coverage for more than 14 years (and counting).
The BDC’s board declared a fourth-quarter dividend of $0.48 per share, for a yield of 9.65% (as of this writing).
The dividend is safe; the company’s payout ratio is just 83.12%. Moreover, the high yield isn’t a fluke or the result of a recent share-price decrease; ARCC stock’s five-year average dividend yield is 9.2%.
Ares Capital Stock’s Share Price at Record Highs
Had you invested a dollar in Ares Capital’s 2004 initial public offering (IPO), that investment would be worth $9.48 today. That same investment would have returned just $5.48 from the S&P 500 or $1.30 from the BKX TR Bank Index.
Many of the gains from ARCC stock have been a result of reinvesting quarterly dividends, although you can’t overlook Ares Capital Corporation’s high share-price increases. As of this writing, Ares Capital stock is up by 16% year-to-date and 11.5% year-over-year. ARCC stock hit a new record intraday high of $19.94 on November 27.
The outlook for Ares Capital stock’s share price is robust, with Wall Street analysts providing a 12-month consensus forecast of $20.54 and high forecast of $21.00 per share.
Chart courtesy of StockCharts.com
The Lowdown on Ares Capital Corporation
Ares Capital Corporation is an outstanding BDC with a diverse portfolio that has provided its shareholders with inflation-crushing dividends and big share-price gains.
ARCC stock has paid reliable, increasing quarterly dividends for 14+ years, provided 13% annualized share-price returns to shareholders since its IPO, and provided share-price returns that are 85% higher (based on total returns) than those of the S&P 500 since its IPO. Among its peers, Ares Capital stock has the best 10-year annualized share-price performance.
Furthermore, the company has a healthy balance sheet with more than $5.0 billion of liquidity and capital resources. This—coupled with a high-interest- rate environment—bodes well, not just for the future of ARCC stock’s price, but also its stable, high-yield dividends.
