To The Moon

$Ares Capital(ARCC)$

In this article, we’ll take a closer look at Ares Capital Corporation (ticker symbol: ARCC). As one of the largest business development companies (BDCs) in the United States, Ares Capital has established itself as a reliable dividend payer over the years. We’ll explore the company’s business model, analyze its recent performance, and discuss its dividend payouts. Finally, I’ll share my personal perspective on whether Ares Capital could be a good addition to your portfolio.

What is Ares Capital?

Ares Capital Corporation is one of the largest publicly traded business development companies in the United States. The company provides financing solutions to middle-market businesses through debt and equity investments, including senior loans and mezzanine debt. Its diversified portfolio spans various industries such as healthcare, technology, and manufacturing.

With a focus on generating strong returns while managing risk, Ares Capital is required to distribute at least 90% of its taxable income as dividends. Backed by Ares Management, the company is recognized for its disciplined investment strategy and strong track record of consistent dividend payments. In their recent earnings, Ares Capital

Earning Overview

Ares Capital Corporation (ARCC) reported its third-quarter 2024 financial results, highlighting solid performance and strategic growth.

Total Investment Income: $775 million, an 18.3% increase from the same period last year. Net Investment Income: $361 million, or $0.57 per share, up from $289 million, or $0.52 per share, in the prior year. Core Earnings Per Share: $0.58, slightly below the $0.59 reported in Q3 2023. GAAP Net Income: $394 million, or $0.62 per share, compared to $500 million, or $0.89 per share, in the previous year. Net Asset Value (NAV) Per Share: Reached a record high of $19.77, up from $19.24 at the end of 2023.

Fundamental Analysis

Ares Capital reported GAAP net income of $0.62 per share, with net investment income per share at $0.57, reflecting consistent performance. The total fair value of the company’s investments showed solid growth, reaching $25.91 billion, an increase from the previous year. The portfolio maintained a strong weighted average yield of 10.7%, demonstrating robust returns.

In terms of operating results, Ares Capital reported total investment income of $775 million, a $20 million increase compared to the previous quarter. Despite incurring higher total operating expenses of over $400 million, the company achieved net investment income of $361 million, showcasing its steady income generation.

On the balance sheet, Ares Capital reported total assets of $27.1 billion, including $486 million in cash and cash equivalents. The company’s liabilities include $13.5 billion in debt and total liabilities of $14.3 billion. Stockholders’ equity stands at $12.7 billion, highlighting a strong financial foundation with a solid equity base relative to liabilities and a healthy liquidity position.

Portfolio Well Diversified

The portfolio is well-diversified, with a total fair value of $25.9 billion spread across 535 portfolio companies as of September 30. The top 15 investments accounted for 26% of the portfolio, while the remaining 74% was distributed among other holdings. Notable companies in the top 15 include Ivy Hill Asset Management, Senior Direct Lending Program, and Neptune BOS Inc.

Examining Ares Capital's portfolio company earnings and credit statistics reveals strong performance. In Q3 of the previous year, the portfolio's average EBITDA reached $19.9 million, and the weighted average net leverage multiple was 5.8x. This demonstrates robust earnings generation with a relatively stable leverage ratio.

Additionally, the portfolio's interest coverage ratio, which measures the ability to pay interest on outstanding debt, stood at 1.8x. This indicates that Ares Capital's portfolio companies are well-positioned to meet their debt obligations, reflecting the financial stability of their loan investments.

Status of Loans

Ares Capital’s non-accrual loans remain relatively low compared to the overall portfolio, reflecting strong credit management. As of Q3, non-accrual loans amounted to $323 million in amortized cost, representing just 1.3% of the total portfolio. The fair value of these loans was $166 million, accounting for only 0.6% of the portfolio. This underscores the portfolio's stability and highlights Ares Capital's effective credit risk management, with the majority of investments performing well.

Investment Backlog

As of October 24, Ares Capital had an investment backlog of approximately $2.8 billion. Notably, 89% of the backlog consists of first-lien senior secured loans, reflecting a conservative and low-risk strategy. In terms of industry distribution, healthcare services account for the largest share at 27%, followed by food and beverage at 19% and software and services at 10%.

This diversified backlog positions the company to effectively manage risk while maintaining exposure to various industries, further reinforcing the portfolio’s resilience.

Dividend Overview

Ares Capital pays a regular quarterly dividend, currently set at $0.48 per share. In certain quarters, the company has also issued additional dividends, demonstrating its commitment to returning value to shareholders. Over time, Ares Capital has maintained a strong and consistent dividend payment history.

According to TipRanks, Ares Capital offers an impressive dividend yield of 8.66%, significantly exceeding the sector average of 1.4%. The company’s dividend payout ratio stands at 79.5%, indicating a balanced approach to distributing capital to shareholders while retaining sufficient funds for future growth and investments.

Valuation

The average 12-month price target for Ares Capital is $22.45, suggesting a potential upside of 1.49% from its current price of $22.12. Analyst price targets range from $22 to $23, reflecting a positive outlook on the stock. Most analysts rate Ares Capital as a strong buy, highlighting confidence in its stable performance and potential for future growth.

Conclusion

Ares Capital is a strong choice for income-focused investors seeking stability and consistent returns. The company’s diversified portfolio spans various industries, with a significant portion allocated to senior secured loans, providing an added layer of security to its investments. The low percentage of non-accrual loans highlights effective risk management, ensuring the portfolio remains high quality.

The stock’s current valuation appears reasonable, trading at 8.5 times earnings and just slightly above its price-to-book value, making it an appealing option for long-term growth. Additionally, its high dividend yield of over 8.6% offers an attractive income stream, particularly in a low-interest-rate environment. Ares Capital's proven track record of consistent and growing dividend payments further underscores its reliability as a dividend stock.

Analysts also recommend Ares Capital as a strong buy, reflecting confidence in its performance and potential for capital appreciation. If you found this information helpful, please like the articles and remember to conduct your own research before making any investment decisions. Happy investing!

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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