Ares Capital Corporation ARCC, a business development company or BDC boasting an impressive dividend yield of 8.25%, is drawing the attention of income investors. Being a BDC and maintaining its regulated investment company (RIC) status, the company has to distribute roughly 90% of its taxable income as dividends.
Over the last few years, ARCC has consistently paid 48 cents per share as a quarterly dividend. It had last announced a dividend hike of 11.6% in October 2022. Over the past five years, the company increased its dividend five times, with an annualized dividend growth rate of 5.45%.
Meanwhile, compared with the wider financial - SBIC and Commercial industry, ARCC’s dividend yield is slightly lower.
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On the other hand, the dividend yield for its close peers – Hercules Capital, Inc. HTGC and Main Street Capital Corporation MAIN – is not so impressive. At present, HTGC has a dividend yield of 7.45%, and MAIN’s dividend yield is 4.82%.
Apart from regular quarterly dividend payouts, ARCC has a steady share repurchase program in place. In April 2023, it announced an increase in its share repurchase authorization to $1 billion. As of Dec. 31, 2024, the entire authorization remained available.
Hence, ARCC is an attractive investment option for income investors. But before making any investment decision, you must check out the company fundamentals to understand risk and rewards.
Other Factors to Play for Ares Capital
Growth in Total Investment Income: Ares Capital has been witnessing a steady rise in total investment income (its revenues). While the metric declined in 2020, it recorded a five-year (2019-2024) compound annual growth rate (CAGR) of 14.4%. The increase was primarily driven by a rise in demand for personalized financing solutions and relatively lower interest rates, which boosted investment income.
ARCC is expected to continue witnessing a rise in investment income in the quarters ahead, given the regulatory changes, resilient economic expansion and rising demand for customized financing. In the fourth-quarter earnings release, the outgoing CEO Kipp deVeer said, “As we enter 2025, we believe we are well positioned for what we expect will be an increasingly active investing market for acquisition finance and growth capital opportunities.”
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Solid Originations: Last year, Ares Capital originated $15.08 billion in gross investment commitments to new and existing portfolio companies. This is impressive compared with $6 billion of gross investment commitments in 2023 and $9.9 billion in 2022. Further, from Jan. 1, 2025, through Jan. 28, Ares Capital made new investment commitments of almost $1.2 billion, of which nearly $864 million were funded. Driven by the rise in demand for customized financing, the company is likely to continue witnessing a steady increase of investment commitments.
Additionally, the fair value of Ares Capital’s portfolio investments was $26.72 billion as of Dec. 31, 2024. The fair value of accruing debt and other income-producing securities was $23.64 billion. As of the same date, the net asset value was $19.89 per share.
Bearish Analyst Sentiments for ARCC
At present, analysts don’t seem to be fully convinced about Ares Capital’s growth trajectory. Over the past month, the Zacks Consensus Estimate for 2025 and 2026 earnings has moved lower.
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The Zacks Consensus Estimate for ARCC’s 2025 and 2026 earnings implies a year-over-year decline of 6% and 1.2%, respectively.
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Find the latest earnings estimates and surprises on Zacks Earnings Calendar.
ARCC Shares: A Bit Expensive
Over the past year, shares of ARCC have rallied 15.7%, outperforming the industry’s growth of 10.8%.
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Additionally, Ares Capital stock appears slightly expensive relative to the industry. The stock is currently trading at the forward 12-month price/earnings (P/E) of 10.60X. This is above the industry’s 9.86X, reflecting a slightly stretched valuation.
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Final Thoughts on Ares Capital Stock
ARCC shares provide an impressive dividend yield. Also, relatively lower rates and decent economic expansion will result in a solid demand for personalized financing. However, bearish analyst sentiments and slightly overvalued stock are on the downside.
Hence, investors must watch how the next couple of months play out for ARCC stock before making an investment decision. Those who already have it in their portfolio can consider holding on to it.
At present, Ares Capital carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
