ARCC Stock Overview
Ares Capital Corporation is a business development company specializing in acquisition, recapitalization, mezzanine debt, restructurings, rescue financing, and leveraged buyout transactions of middle market companies.
Ares Capital Corporation Competitors
Price History & Performance
|Historical stock prices|
|Current Share Price||US$16.88|
|52 Week High||US$23.00|
|52 Week Low||US$16.71|
|1 Month Change||-12.54%|
|3 Month Change||-10.50%|
|1 Year Change||-18.18%|
|3 Year Change||-7.63%|
|5 Year Change||2.37%|
|Change since IPO||12.38%|
Recent News & Updates
Where Prospect Capital Clearly Beats Ares Capital
Summary In this volatile market, many mispricings are surfacing providing great opportunities to improve your fixed-income portfolio through swaps. Ares Capital and Prospect Capital are two we look at today. While popular wisdom loves Ares Capital stock, and we agree, there are better opportunities for even safer yields with Prospect Capital. Introduction The markets are treacherous and volatile now, but this volatility often creates distortions and relative mispricings that allow for excellent opportunities to swap out of a relatively overvalued security for one that is relatively undervalued. These swaps can improve your portfolio’s yield without adding risk, or provide you with more price upside or less risk than you currently have. Swaps are one of the best ways to beat the fixed-income benchmarks. For those interested in fixed-income swapping strategies, I highly recommend this article. Prospect Capital Prospect Capital (PSEC) is a business development company, aka BDC, that has been public for 18 years. It is managed by Prospect Capital Management L.P.. Like many BDCs, it invests in middle market sized private companies providing them various types of loans (generally senior and subordinated secured debt) as well as having some equity investments and investments in collateralized loan obligations (CLOs). Here is what Yahoo Finance says about PSEC. Prospect Capital Corporation is a business development company. It specializes in middle market, mature, mezzanine finance, later stage, emerging growth, leveraged buyouts, refinancing, acquisitions, recapitalizations, turnaround, growth capital, development, capital expenditures and subordinated debt tranches of collateralized loan obligations, cash flow term loans, market place lending and bridge transactions. It also makes real estate investments particularly in multi-family residential real estate asset class. The fund makes secured debt, senior debt, senior and secured term loans, unitranche debt, first-lien and second lien, private debt, private equity, mezzanine debt, and equity investments in private and microcap public businesses. It focuses on both primary origination and secondary loans/portfolios and invests in situations like debt financings for private equity sponsors, acquisitions, dividend recapitalizations, growth financings, bridge loans, cash flow term loans, real estate financings/investments. It also focuses on investing in small-sized and medium-sized private companies rather than large public companies. The fund typically invests across all industry sectors, with a particular expertise in the energy and industrial sectors. PSEC currently sells for $6.53 and yields 10.64%. Since the bottom of the 2008-2009 financial crisis, PSEC’s performance has been reasonably good as holders received very high dividends and their common stock price has held fairly steady. Leading up to and during the financial crisis, they did take a good hit to their stock price. We would be neutral on PSEC common stock here. PSEC Price Chart Since 2009 Bottom Yahoo Finance Prospect Capital’s Note Maturing 10/15/2028 – CUSIP 74348TAW2 The PSEC note that we like is the 3.437% note maturing on 10/25/2028 with the CUSIP number 74348TAW2. A “note” is just a shorter term bond. Amazingly this 3.437% note is now yielding approximately 9%. This shows you just what has happened to the fixed-income market over the past year. This note was issued almost exactly 1 year ago at par $100. The bid/offer is now $74/$75 which represent a yield-to-maturity (YTM) of 8.9% to 9.1%. The 9% yield is outstanding given that PSEC has a strong credit rating. This note, yielding 9%, is rated BBB- by S&P and Baa3 by Moodys. These are both investment grade ratings. It has the same credit rating as the well know blue chip BDC Main Street Capital (MAIN) as well as other larger cap BDC bonds like those from Ares Capital (ARCC), and Goldman Sachs BDC (GSBD) but offers a much higher YTM. I agree with the credit ratings for the following reasons, despite PSEC’s portfolio of investments being generally more risky than other BDCs with the same rating. Here are the reasons: It operates at lower leverage than other BDCs to compensate for not having primarily senior secured debt investments. While a typical BDC with the same credit rating has leverage of around 55%, PSEC operates with a leverage only 37%. Unlike other BDCs with the same credit rating, PSEC has issued a healthy chunk of preferred stock which provides extra protection for the bonds. Having preferred stock provides PSEC with flexibility in that they never have to refinance preferred stocks and preferred stock dividends can be suspended if problems arise – which is extremely unlikely given that no preferred stock from a BDC has every gone bad. The value of their preferred stocks must be wiped out before the bonds would even start to be impacted. And it seems that lately PSEC is moving in the direction of carrying a higher amount of preferred stock versus bonds. If this trend continues, the bonds just get safer and safer as the debt leverage gets lower and lower. BDCs have legal leverage limits. They must keep leverage below 67%. This means that a BDC bond should theoretically never default, and in reality, no BDC bond has ever defaulted. That alone should give PSEC an investment grade credit rating. BDCs almost universally have a small number of large bonds that they have issued to raise capital. This is somewhat risky because when a large bond comes due, the company must be able to refinance it. During times of financial crises or where credit has become harder to obtain, refinancing can be problematic. But PSEC uses an unusual financing model and has issued hundreds of smaller bonds which greatly reduces refinancing risk There are investors who don’t like PSEC common stock because the company has issued common stock below net asset value ((NAV)). But as a bondholder, we really like that management will raise cash through stock issuance in order to insure that leverage remain low and liquidity good. So what we have here, with this PSEC note, is a large mispricing. While BDCs with the same rating and approximate maturity tend to have a YTM of around 7.5%, the current YTM of 9% for this PSEC bond looks just outstanding. We consider this PSEC note a strong relative buy. Ares Capital Like PSEC, Ares Capital is a BDC. It has also been around for 18 years. They are managed by Ares Capital LLC. Like PSEC, they serve middle market companies generally making senior 1st lien and 2nd lien loans but they also invest in mezzanine loans, equity and preferred equity. Here is what Yahoo Finance says about ARCC. Ares Capital Corporation is a business development company specializing in acquisition, recapitalization, mezzanine debt, restructurings, rescue financing, and leveraged buyout transactions of middle market companies. It also makes growth capital and general refinancing. It prefers to make investments in companies engaged in the basic and growth manufacturing, business services, consumer products, health care products and services, and information technology service sectors. The fund will also consider investments in industries such as restaurants, retail, oil and gas, and technology sectors. It focuses on investments in Northeast, Mid-Atlantic, Southeast and Southwest regions from its New York office, the Midwest region, from the Chicago office, and the Western region from the Los Angeles office. ARCC Price Chart Since 2009 Bottom Yahoo Finance ARCC currently sells for $16.97 with a yield of 9.81%. ARCC common stock has clearly been a much better performer than PSEC since inception. So here we reverse ourselves. While we like the PSEC bond much better than the PSEC common stock, we think ARCC common stock is a better buy than their bonds. We think that ARES bonds/notes could fall further in price even if interest rates stabilize here. Ares Capital Note Maturing November 15, 2031 – CUSIP 04010LBC6 The ARES Capital note that we are looking at is the 3.2% note maturing November 15, 2031 CUSIP number 04010LBC6. The current YTM on this note is 7.2%. There are 2 other ARCC notes that mature sooner than this one, and we also consider them a sell. You will see these in the table below. ARCC has the same credit rating as PSEC, BBB- from S&P and Baa3 from Moodys. Bond yields generally move higher the further out the maturity date is. So it is surprising that this ARCC note, which is 3 years longer in maturity than the PSEC note, has a yield so much below the 9% YTM of the PSEC bond with the same rating. Here is a comparison chart of other BDC bonds with same credit rating as PSEC and ARCC and maturing around the same time as our PSEC recommendation, including the ARCC bond upon which we are focusing.
Better Buy: Ares Capital's 9.3% Yield Or FS KKR's 12.6%
Summary Both Ares Capital and FS KKR Capital boast investment grade credit ratings. ARCC has a tremendous track record whereas FSK pays out a much higher dividend yield. Which one is the better buy? Both Ares Capital Corp. (ARCC) and FS KKR Capital (FSK) are high yield business development companies (i.e., BDCs) (BIZD) that boast investment-grade credit ratings. In this article, we will compare them side by side and offer our take on which one is a better buy. Ares Capital Vs. FS KKR Capital - Balance Sheet As was already stated, both boast investment grade credit ratings of Baa3 (Stable) or equivalent. ARCC boasts immense liquidity of $4.6 billion, with a leverage ratio of 1.23x as of the end of Q2. While the leverage ratio is on the high end of its target range, its substantial liquidity and strong underwriting track record offset this risk to a considerable extent. Furthermore, after Q2 ended, ARCC issued a considerable amount of equity, which has likely reduced its leverage ratio by a considerable amount. Meanwhile, FSK's leverage ratio is a little lower at 1.15x as of the end of Q2, while its total liquidity stands at $2.7 billion. The company's debt maturity ladder is conservatively positioned, with no maturities until 2024 and the vast majority of its debt not maturing until 2027 or later. While both appear to be in solid shape, we give ARCC the slight edge here given that its liquidity is superior to FSK's as well as the fact that a greater percentage of its debt is fixed rate. Ares Capital Vs. FS KKR Capital - Investment Portfolio ARCC's investment portfolio is very well positioned to benefit from rising interest rates. ARCC's CEO stated during the Q2 earnings call: As of quarter end, holding all else equal and after considering the impact of income-based fees, we calculated that a 100-basis point increase in short-term rates could increase our annual earnings by approximately $0.23 per share, a 14% increase above this quarter's core EPS run rate. A 200-basis point increase in short-term rates could increase our total annual earnings by approximately $0.44 per share, a 26% increase above this quarter's core EPS run rate. On top of that, its portfolio companies have strong interest coverage of 2.9x, giving them considerable capacity to handle rising interest rates. Furthermore, with a conservative 44% average loan to value ratio among its portfolio businesses, there is considerable protection for its investments should they enter into default. Overall, 71% of its investments are senior secured debt and its non-accruals stood at a mere 0.9% at fair market value as of the end of Q2. FSK is also well-positioned to benefit from rising interest rates, given that 87% of its debt investments have floating interest rates. On the other hand, its portfolio underwriting performance continues to lag behind ARCC's as non-accruals at fair value now stand at 2.9% as of the end of Q2. Moving forward, this performance should improve given that management continues to prune legacy investments from the portfolio, with 90% of the investment portfolio now originated by either KKR credit or the FS KKR advisor. Among the 90% of the portfolio that has been originated by KKR/FS KKR, the non-accrual rate on a fair value basis is a mere 0.5%. Finally, with 93% of its portfolio invested in senior secured debt or asset-based finance investments, its portfolio is positioned rather defensively. Overall, we give the edge to ARCC here as its non-accruals are considerably lower than FSK's. Ares Capital Vs. FS KKR Capital - Dividend Safety ARCC's dividend is clearly safer than FSK's right now, given that it has quite a bit of spillover income: We currently estimate that our spillover income from 2021 into 2022, will be approximately $651 million or $1.32 per share. We believe having a strong and meaningful undistributed spillover supports our goal of maintaining a steady dividend throughout market cycles and sets us apart from many other BDCs that do not have this level of spillover. In contrast, FSK employs a variable dividend payout policy. While its yield is considerably higher than ARCC's at the moment, investors should keep in mind that the exact level of it is also far less reliable than ARCC's payout. Ares Capital Vs. FS KKR Capital - Track Record ARCC has a hands-down better track record than FSK, as it has crushed SLRC since FSK went public: ARCC Total Return Price data by YCharts
Why We Own Ares Capital Instead Of Owl Rock Capital
Summary Ares Capital and Owl Rock Capital are both investment grade BDCs. They both pay out very high dividend yields. We share three reasons why we own ARCC instead of ORCC. Both Ares Capital Corp (ARCC) and Owl Rock Capital Corp (ORCC) have investment grade (BBB- Stable from S&P) credit ratings and also pay out very high dividend yields. While some investors prefer to invest in both and some even prefer ORCC given that it pays out a higher dividend yield and also trades at a cheaper valuation multiple relative to NAV, we currently own ARCC instead of ORCC. In this article we share three reasons why. #1. Superior Track Record The biggest reason why we are putting our hard-earned capital into ARCC instead of ORCC right now is because - given the significant macroeconomic and geopolitical uncertainty and risk surrounding us today - we want to be able to sleep well at night. While ORCC's management certainly seem competent and have strong underwriting performance thus far, they have also not weathered a severe and prolonged recession. In contrast, ARCC's management weathered the Great Financial Crisis and have put up very impressive numbers over the years, crushing the S&P 500 (SPY) and broader BDC sector (BIZD) in the process: ARCC Total Return Price data by YCharts This tells us that ARCC's management clearly has superior capital allocation ability and is able to navigate changing market environments with skill. In contrast, we have no way of truly knowing how ORCC's management will navigate a severe recession. Furthermore, since ORCC went public right before COVID-19 hit a few years ago, ARCC has meaningfully outperformed ORCC, further cementing our conviction in its management team: ARCC Total Return Price data by YCharts #2. Greater Dividend Safety Another reason why we prefer ARCC relative to ORCC at the moment is its superior dividend safety. BDCs are primarily income instruments, so while the size of the yield is important, the safety of that yield through periods of market turbulence is arguably just as important. ARCC hiked its dividend in Q2 by 2.4% to $0.42. This fact alone says a lot about the company's dividend safety, as the saying goes: "the safest dividend is the one that has just been raised." On top of that, its Q2 net investment income of $0.52 easily supported its quarterly dividend with a 1.24x coverage ratio. As a result of its very strong quarterly results, ARCC declared a special $0.03 per share dividend as well. Moving forward, the dividend should continue to be quite safe, and possibly even continue growing, as ARCC is well positioned to benefit from rising interest rates. Finally, ARCC has a lot of spillover income, which would likely support the current dividend level for a while, even if the economy turned south and nonaccruals piled up, leading to lower net investment income. As management stated on the Q2 earnings call: [W]e felt highly confident in our ability to increase the dividend this quarter. And I'll couple that by saying we've also built a pretty substantial amount of spillover income, as you're aware of the company. And I don't feel the need, frankly, to add any more to that number. I could argue that number might even be a little bit high, which is why we've been using it to pay a special dividend throughout this year. So we feel good about the earnings trajectory, and we feel good about the dividend where it is today and potentially growing from here. In contrast, ORCC's dividend coverage ratio in Q2 was much tighter. Net investment income came in at $0.32 on a per share basis, barely covering its $0.31 dividend payout. On top of the tight coverage, ORCC lacks the substantial spillover income that ARCC has and management refused on the earnings call to guide for continued dividend growth nor special dividend payouts in the near term, whereas ARCC has implied that it will continue to pay out a special dividend for the remainder of fiscal 2022 at a minimum. #3. Valuation Gap Is Not As Wide As It Appears While ORCC is cheaper relative to NAV than ARCC is (ORCC trades at an 11.12% discount to NAV, whereas ARCC trades at a slight premium of 2.60% to its last reported NAV), this gap is not as wide as it first appears. First and foremost, ARCC's expense ratio is slightly lower than ORCC's (5.32% on a non-leveraged basis for ARCC relative to 5.55% on a non-leveraged basis for ORCC), its cost of leverage is lower at 3.44% for ARCC relative to 3.82% for ORCC, and its cost of capital is also cheaper. Furthermore, it is able to issue shares at a slight premium to NAV and combine the equity with much cheaper debt and reinvest the proceeds on a very accretive basis, whereas ORCC cannot issue equity without diluting shareholders and its cost of capital is meaningfully higher.
Better Buy: Ares Capital's 8.8% Yield Or SLR Investment's 11%
Summary Both Ares Capital and SLR Investment boast investment grade credit ratings. ARCC has a tremendous track record whereas SLRC pays out a much higher dividend yield. Which one is the better buy? Both Ares Capital Corp. (ARCC) and SLR Investment Corp. (SLRC) are high yield business development companies (i.e., BDCs) (BIZD) that boast investment-grade credit ratings. In this article, we will compare them side by side and offer our take on which one is a better buy. Ares Capital Vs. SLR Investment - Balance Sheet As was already stated, both boast investment grade credit ratings of Baa3 (Stable) or equivalent. When we look at ARCC's specifics, we find that it has total liquidity of $4.6 billion (slightly more than one-fifth of its total enterprise value) with a leverage ratio of 1.23x. Meanwhile, SLRC's leverage ratio is much lower at 0.96x, at the lower end of its 0.9x to 1.25x leverage target range. While management did not provide a specific number, it said that it had "ample available capital to take advantage of the current attractive investment environment." While both appear to be in solid shape, we give SLRC the slight edge here given that its leverage ratio is considerably lower than ARCC's. ARCC Vs. SLRC - Investment Portfolio SLRC's portfolio is quite defensively positioned with 97.2% of its comprehensive debt portfolio invested in first lien senior secured loans, which provide greater downside protection during recessions. On top of that, 99.8% of the portfolio consisted of senior secured loans, with the remaining 2.6% that are not first lien senior secured loans being second lien cash flow loans and second lien asset-based loans. The company's investments are very well diversified across 780 distinct issuers and over 100 industries. The average exposure to a single counterparty was $3.5 million or 0.1% of the total portfolio and its largest industry exposures were defensive in nature (health care, diversified financials, life sciences and recurring software). The weighted average interest coverage for their cash flow loans to upper mid-market sponsor-backed companies was strong at 3.1x. Finally, their conservative portfolio construction seems to be paying off with nonaccruals at 0.6% of fair market value. ARCC's portfolio meanwhile, enjoys strong interest coverage of 2.9x and an average loan to value ratio of only ~44%. Meanwhile, 71% of its total investment portfolio is senior secured debt, with average position size exposure of 0.3%. On top of that, ARCC's non-accruals were just 0.9% at fair market value. Finally, like SLRC, its top 5 industries are all relatively defensive, (software, healthcare, financials, commercial and professional services, and insurance services). Both businesses appear very well positioned to benefit from rising interest rates, with SLRC's management stating on its most recent earnings call: our funding profile is in a strong position to weather a rising rate environment with $506 million up to $1 billion of funded debt comprised of senior unsecured fixed rate notes at a weighted average annual interest rate of 3.9%... if interest rates were to move another 100 basis points or 200 basis points, the portfolio at June 30, 2022, would generate $0.08 per share and $0.18 per share of incremental net investment income, respectively, on an annualized basis. Meanwhile, ARCC's CEO stated after their most recent earnings call: As of quarter end, holding all else equal and after considering the impact of income-based fees, we calculated that a 100-basis point increase in short-term rates could increase our annual earnings by approximately $0.23 per share, a 14% increase above this quarter's core EPS run rate. A 200-basis point increase in short-term rates could increase our total annual earnings by approximately $0.44 per share, a 26% increase above this quarter's core EPS run rate. Both businesses have strong underwriting performances and have conservatively positioned portfolios that are poised to benefit from rising interest rates. Overall, we assign a draw here as SLRC's portfolio is slightly more conservatively positioned and also has a higher weighting towards loans while ARCC is poised to benefit slightly more from rising interest rates. Dividend Safety ARCC's dividend is clearly safer than SLRC's at the moment as its core income in Q2 matched its dividend payout and it has significant spillover income that will support its dividend in the quarters to come alongside its strong expected per share growth in earnings due to rising interest rates: We currently estimate that our spillover income from 2021 into 2022, will be approximately $651 million or $1.32 per share. We believe having a strong and meaningful undistributed spillover supports our goal of maintaining a steady dividend throughout market cycles and sets us apart from many other BDCs that do not have this level of spillover.
More Attractive After Quarterly Results: Ares Capital Or Oaktree Specialty Lending?
ARCC and OCSL are two investment-grade BDCs that recently reported quarterly results. Which one is more attractive after Q2 results? We compare them side by side and offer our take. Both Ares Capital (ARCC) and Oaktree Specialty Lending (OCSL) have investment-grade (BBB- Stable from S&P) credit ratings, vaulting them into the upper echelon of quality Business Development Companies (i.e., BDCs) (BIZD). Both also happen to offer mouthwatering dividend yields, with ARCC boasting an 8.2% dividend yield and OCSL boasting an 8.8% dividend yield. In this article, we will review their most recent quarterly results and then compare them side by side and offer our take on which one is more attractive. Quarterly Results ARCC's Q2 results were very strong thanks to increased investment activity, rising interest rates, and solid investment credit performance. Core earnings per share beat consensus estimates by $0.02 and increased by $0.04 (9.5%) sequentially, though they were down 13.2% year-over-year. However, net investment income - the most important indicator of dividend coverage and sustainability - was up sharply. On a per share basis, it increased by 26.8% sequentially and by 33.3% year-over-year. Meanwhile, OCSL posted adjusted investment income of $0.33 per share in its latest quarter. This was flat sequentially. Meanwhile, adjusted net investment income came in at $0.17 per share, down sequentially from $0.18. Balance Sheet As was already stated, both ARCC and OCSL have the same investment-grade credit rating and outlook from S&P, which puts them on similar footing in terms of perceived risk and access to capital. ARCC has $4.6 billion in total liquidity (~21.3% of its enterprise value) with a leverage ratio of 1.23x. Only 27.7% of ARCC's debt has a floating interest rate. OCSL, meanwhile, has $489 million in total liquidity (~18.5% of its enterprise value) and a leverage ratio of 1.08x. 78.5% of OCSL's debt has a floating interest rate. While both appear to be in solid shape, OCSL seems to have the stronger balance sheet given its meaningfully lower leverage ratio. On the other hand, ARCC's liquidity represents a slightly higher percentage of its enterprise value, and it also has much less exposure to rising interest rates. Essentially what it boils down to is that if interest rates remain neutral or decline from present levels, OCSL has the better positioned balance sheet. However, if interest rates continue to rise, ARCC is in a better position. Overall, we will consider this comparison to be a draw as we prefer ARCC's greater protection against further increases in interest rates but at the same time value OCSL's much lower leverage ratio which gives it more flexibility to invest opportunistically and better protection against downside scenarios. Investment Portfolio ARCC's portfolio consists of 64% senior secured debt and 74% of its investments are floating rate. ARCC's portfolio is overweight more defensive sectors, with its top five sectors being software, healthcare, commercial and professional services, insurance services, and power generation. Non-accruals were very low as of 6/30/22, amounting to just 0.9% at fair value and 1.6% at amortized cost. OCSL's portfolio consists of ~87% senior secured debt and 88% of its debt investments are floating rate, meaning that ~79% of the total investment portfolio benefits from rising interest rates. Similar to ARCC's portfolio, OCSL's portfolio is also mostly overweight more defensive sectors, with its top five sectors being software, pharmaceuticals, data processing, biotechnology, and healthcare. In fact, its portfolio looks even more defensively positioned given its greater emphasis on medical-related industries. The company continued its streak of flawless underwriting with 0 investments on non-accrual. Overall, OCSL appears to have a significantly superior investment portfolio as it has much greater exposure to senior secured debt, fewer non-accruals, and a more defensively positioned sector allocation as well. On top of that, its greater exposure to rising interest rates helps to somewhat offset its greater exposure to rising interest rates in its outstanding debt. Dividend Safety Both companies hiked their dividends following announcing quarterly results. OCSL increased its dividend by 3% to $0.17 per share, and ARCC increased its dividend by 2.4% to $0.42 per share. OCSL's dividend coverage ratio is currently fairly tight at 1.06x. However, its interest rate sensitivity is much lower than ARCC's given that it has greater balance between floating rate debt obligations and investments. As a result, especially when combined with its lower leverage and more conservatively positioned portfolio, its cash flow is likely to be more stable moving forward than ARCC's will be. ARCC's dividend coverage ratio is phenomenal at present as its $0.52 per share in net investment income easily covered its $0.42 quarterly dividend at a 1.24x ratio. Furthermore, ARCC declared a $0.03 special dividend for the quarter and still has a lot of spillover income, further securing its dividend. As management stated on the earnings call: we never talk about dividends beyond this quarter, but we felt highly confident in our ability to increase the dividend this quarter. And I'll couple that by saying we've also built a pretty substantial amount of spillover income, as you're aware of the company. And I don't feel the need, frankly, to add any more to that number. I could argue that number might even be a little bit high, which is why we've been using it to pay a special dividend throughout this year. So we feel good about the earnings trajectory, and we feel good about the dividend where it is today and potentially growing from here.
Ares Capital Is Sliding And I Am Buying This 8% Yielding BDC
ARCC slid -3.58% yesterday upon news on an 8 million share public offering, and this could continue into Monday's trading session. Investors should read through the public offering to see if they are in agreement with how ARCC's management will allocate the proceeds. ARCC delivered a beat on its Q2 EPS and net investment income, which helped position ARCC to pay its 3rd consecutive special dividend on top of its quarterly dividend. ARCC has just raised its dividend again, and after it's paid, ARCC will have paid $27.39 in dividends since it went public, which is 182.6% of its initial value IPO value. Shares of Ares Capital (ARCC) slid more than -3% on 7/29 after news broke that ARCC would price 8 million shares in a public offering. The 8 million share offering came several days after ARCC beat Q2 earnings estimates on both EPS and investment income and rewarded shareholders with a 2.4% quarterly dividend increase. ARCC is the largest publicly traded BDC by net assets and market cap, and plays an important role as one of the largest direct lenders in the U.S. to private or public U.S. firms with market caps under $250 million. Is ARCC an investment that's going to gain tremendous notoriety? Is ARCC going to break out and generate massive amounts of capital appreciation? ARCC isn't flashy, it's not going to have the same tailwind potential as some technology companies. From a capital appreciation standpoint, an S&P index fund will probably appreciate more over an extended period. ARCC is an income investment that is probably only interesting to investors looking for larger than average income generation potential. I like ARCC for under $20, and I am looking to buy it as it slides. Ares Capital The good news from Q2 In Q2 of 2022, ARCC committed to roughly $3.1 billion new investments, including $570 million of new investment commitments to IHAM, which have already been funded with $2.9 billion of capital. The $3.1 billion of new investments included 21 new portfolio companies and 31 existing portfolio companies. These additional investments are made up of 71% first lien senior secured loans, 1% second lien senior secured loans, 1% subordinated certificates of the Senior Direct Lending Program (the "SDLP"), 3% senior subordinated loans, 3% preferred equity, 18% IHAM and 3% were in other equity. Of these, 89% were in floating rate debt securities, of which 94% contained interest rate floors. Ares Capital In Q2, ARCC generated $0.46 of EPS which was a $0.02 beat and produced $479 million of investment income which was a beat of $12.79 million, up by 4.4% YoY. ARCC focused on doing deals with larger companies over the past several years, which helped during the downturn, as the weighted average EBITDA of ARCC's portfolio reached $179 million. This is more than 2x from 2017. ARCC believes that the continued increase in market interest rates presents a potential opportunity for the growth of its core earnings. This is due to the large floating rate loan portfolio, which is financed by mostly low-cost, fixed-rate, unsecured sources of financing. ARCC is anticipating that additional rate hikes should drive its quarterly core earnings well past its Q2 level. Ares Capital ARCC's total portfolio at fair value at the end of Q2 was $21.2 billion, and its total assets amounted to $21.8 billion. The weighted average yield on ARCC's debt and other income-producing securities at amortized cost was 9.5%, and the weighted average yield on total investments at amortized cost was 8.7%. The total investment yield at the end of Q2 increased approximately 60 basis points from Q1. These numbers are enticing to me because ARCC should benefit from the rising rate environment as it theoretically will correlate to positive impacts on net interest earnings in Q3. The latest dividend increase is a continuation of a longstanding practice from ARCC ARCC has a long history of paying dividends, with 2005 being its first full year of dividend payments. Since its inception, ARCC has increased its quarterly dividend by 48.28%. ARCC's core earnings and net realized gains have driven its dividend growth, and the rising rate environment has helped ARCC deliver another dividend increase. ARCC's dividend track record is unique, and income investors should take these statistics into consideration. ARCC just provided its 2nd quarterly dividend increase over the past 12 months, which is its 3rd increase in the past 6 quarters and its 53rd consecutive quarter of unchanged or growing dividends. Ares Capital The chart above illustrates all of ARCC's dividends since Q3 2018. Throughout 2019, ARCC paid 4 special dividends in addition to its regular quarterly dividend. This is another aspect that sets ARCC apart from other BDCs as they continuously generate spillover income. ARCC has estimated that its spillover income from 2021 into 2022 will be approximately $694 million, or $1.41 per share. Generating undistributed spillover income helps support ARCC's dividend throughout fluctuating economic and market cycles. Q3 will now be the 3rd consecutive quarter where a special dividend has been declared in addition to the regular quarterly dividend. ARCC went public through an IPO at $15 per share since the fall of 2004 has appreciated by 29.27%. If this statistic was told to investors looking for capital appreciation, they would look at you as if you had lost your mind. As I indicated at the beginning of this article, I look at ARCC as an income vehicle. Including the Q3 2022 dividend, ARCC will have paid $27.39 in dividends since it went public, which is 182.6% of its initial value. When I look at income investments, I just want them to trade sideways, and if they generate a small amount of capital appreciation, it's an added bonus for me. The main focus is income, and ARCC generates income in spades. Its next ex-dividend date is 9/14/22 with a 9/30/22 payout date. ARCC's dividend track record is hard to replicate, and the special dividends are an added bonus on top of the 53 consecutive quarters of unchanged or growing dividends. How the 8 million share offering could be used The market didn't seem to like the 8 million shares ARCC is selling in the public offering. ARCC has granted the underwriters an option to purchase up to an additional 1,200,000 shares of common stock, and the offering is expected to close on 8/2/22. ARCC is expecting to utilize the proceeds to repay certain outstanding indebtedness under its credit facilities. ARCC can reborrow under its credit facilities for general corporate purposes, which include investing in portfolio companies per its investment objective.
|ARCC||US Capital Markets||US Market|
Return vs Industry: ARCC exceeded the US Capital Markets industry which returned -25.4% over the past year.
Return vs Market: ARCC exceeded the US Market which returned -23.2% over the past year.
|ARCC Average Weekly Movement||3.4%|
|Capital Markets Industry Average Movement||0.4%|
|Market Average Movement||6.8%|
|10% most volatile stocks in US Market||15.5%|
|10% least volatile stocks in US Market||2.8%|
Stable Share Price: ARCC is less volatile than 75% of US stocks over the past 3 months, typically moving +/- 3% a week.
Volatility Over Time: ARCC's weekly volatility (3%) has been stable over the past year.
About the Company
Ares Capital Corporation is a business development company specializing in acquisition, recapitalization, mezzanine debt, restructurings, rescue financing, and leveraged buyout transactions of middle market companies. It also makes growth capital and general refinancing. It prefers to make investments in companies engaged in the basic and growth manufacturing, business services, consumer products, health care products and services, and information technology service sectors.
Ares Capital Corporation Fundamentals Summary
|ARCC fundamental statistics|
Is ARCC overvalued?See Fair Value and valuation analysis
Earnings & Revenue
|ARCC income statement (TTM)|
|Cost of Revenue||US$0|
Last Reported Earnings
Jun 30, 2022
Next Earnings Date
|Earnings per share (EPS)||2.05|
|Net Profit Margin||54.92%|
How did ARCC perform over the long term?See historical performance and comparison
10.2%Current Dividend Yield
Does ARCC pay a reliable dividends?See ARCC dividend history and benchmarks
|Ares Capital dividend dates|
|Ex Dividend Date||Dec 14 2022|
|Dividend Pay Date||Dec 29 2022|
|Days until Ex dividend||72 days|
|Days until Dividend pay date||87 days|
Does ARCC pay a reliable dividends?See ARCC dividend history and benchmarks