One of the leading mid-size and larger business finance companies in the U.S. delivers exceptional results for shareholders. Since its IPO in 2004, it has achieved a total return of over 600% when focusing on the best entry points (the price was under $3.5), significantly outperforming the S&P 500. Its dividend policy, which has included stable or increasing payouts for 15 years, has yielded investors a current yield of 8.86%. Interest in its stock is evidenced by speculation that it is part of Warren Buffett's "secret portfolio" due to its emphasis on quality assets, a diversified portfolio, and long-term stable performance.

The company manages nearly $25 billion through more than 500 investment entities, with the majority of its portfolio comprised of first-lien secured loans. Through conservative risk management, the NPL ratio remains at a low 1.3% of face value. In the most recent quarter, the Company reported net investment additions of over $1.3 billion, exceeding expectations and confirming its position as a leader in corporate finance.

Company performance

Ares Capital Corporation $ARCC is one of the leading asset management and specialty finance companies focused on providing lending solutions to mid-sized and larger businesses in the United States. It was founded in 2004 and has since built a strong market position as a Business Development Company (BDC), a special type of investment company regulated by U.S. law that focuses on supporting and financing small and medium-sized businesses.

Ares Capital's core business is providing direct lending, structured finance and equity investments to companies that often do not have access to traditional bank financing. Typical clients are companies with growth in key sectors such as healthcare, technology, services, retail or manufacturing. Ares Capital's financing enables the growth and transformation of these companies while generating stable and diversified interest and capital gains income.

The company has close ties to its parent firm, Ares Management Corporation, a global asset manager with billions of dollars under management. This collaboration provides Ares Capital with access to extensive resources and expertise in credit and investment management, a significant factor in its success. This differentiates Ares Capital from its competitors and allows it to benefit from both specialized market know-how and the advantages of the parent company's global reach.

Ares Capital operates primarily in the United States, but some of its activities extend abroad. It has been able to achieve stable results over the long term through a conservative approach to risk management and a strategy focused on portfolio diversification. In particular, its key products include first and second lien secured loans, mezzanine financing, equity investments and complex structured credit products. In this way, it caters to the needs of a diverse client base, ranging from family-owned businesses to companies owned by private equity investors.

Over the years, Ares Capital has profiled itself as a company that can effectively combine an innovative approach with prudent risk management. Its key advantage is its ability to quickly tailor its financial products to the needs of its clients while ensuring a high return on investment for its shareholders.

Ares Capital's history is an example of continuous growth and adaptation to changing market conditions. Since its inception in 2004, the company has managed to grow its portfolio to billions of dollars and become one of the leaders in the US BDC market. Interestingly, Ares Capital was one of the first companies of its type to take advantage of the new BDC regulatory opportunities to structure more complex and large-scale financial products.

From an investor's perspective, Ares Capital is attractive because of its solid performance, experienced management and clear strategy focused on long-term growth. In addition, it can draw on the deep knowledge and experience of Ares Management Corporation's team of professionals, ensuring that its activities are underpinned by detailed analysis of market trends and risks. Transparency and a responsible approach to portfolio management also play an important role, making it a trusted choice for investors seeking stable returns in a low volatility environment.

Ares Capital's Dividend Policy: Stability and attractive returns

One of the key reasons Ares Capital Corporation is attractive to investors is its generous dividend policy. The company's current dividend yield is 8.86%, equivalent to a payout of $0.48 per share. This high yield puts Ares Capital at the forefront of the minds of investors looking for stable income in an environment of rising market volatility.

As a Business Development Company (BDC), Ares Capital is required to pay out at least 90% of its earnings to shareholders in the form of dividends in order to be exempt from income tax. This obligation also provides investors with the assurance that a significant portion of the proceeds will be returned directly to them. Since its inception in 2004, Ares Capital has established a reputation as a reliable dividend payer, with 15 consecutive years of stable or increasing payouts.

In addition to its attractive yield, Ares Capital boasts a historically strong performance record. Over the past decade, the company has achieved the highest total return and dividend growth among all large publicly traded BDCs.

Another important factor is consistent portfolio growth and improving asset quality. This provides sufficient resources to pay dividends even in more challenging economic conditions. For example, in the third quarter of 2023, Ares Capital exceeded expectations with net investment additions of over $1.32 billion while reducing its NPL ratio to just 1.3%. These results underscore the company's ability to effectively manage its portfolio, thereby protecting and enhancing shareholder value over the long term.

Buffett himself believes in them

Several sources report that Warren Buffett's "secret portfolio" includes Ares Capital, a business development company (BDC) with a forward dividend yield of 8.9%. Ares Capital invests in and makes direct loans to mid-sized companies, has a diversified portfolio and focuses on companies with strong management teams in resilient industries. The company has a solid track record and has increased its dividend by 26.3% over the past 10 years.

How was the company's last quarter?

Ares Capital Corporation delivered strong results in the second quarter of 2024, underscoring its steady growth and strong performance. The company reported GAAP net income per share of $0.52, a slight decrease from USD 0.61 in the same period last year. However, Core EPS, a key metric that better reflects operating performance, increased to USD 0.61 z USD 0.58 in the second quarter of 2023.

The dividend for the third quarter of 2024 was set at USD 0.48 per share, confirming the stability of Ares Capital's dividend policy. The company has a 15-year track record of stable or increasing dividends, an indicator of its consistency and resilience.

Investment activity and portfolio

In the second quarter, Ares Capital entered into new investment commitments of approximately USD 3.9 billionof which was funded by USD 2.9 billion. These commitments included investments in 23 new and 58 existing companies. A significant portion of the new investments (89%) were in senior secured Tier 1 loans, with the majority (92%) tied to floating rate debt.

The company's portfolio at the end of June 2024 totalled USD 24,97 billion, an increase from USD 22.87 billion at the end of 2023. The number of investment entities increased to 525, with 69% of the portfolio by fair value consisting of floating rate securities.

Asset quality and returns - Credit quality remained strong, with non-performing loans accounting for only 1,3 % of the portfolio at nominal value and 0,6 % at fair value. The average yield on debt and other income-oriented securities was 12,2 % at par, slightly below the 2023 level.

Financial position - Ares Capital maintains a strong capital base, with equity capital reaching USD 12.36 billion and a debt-to-equity ratio of 1,06x. It has liquidity available through USD 5 billionwhich provides sufficient flexibility for new investment opportunities.

Outlook

CEO Kipp deVeer emphasized that the steady growth in Core EPS and net asset value per share is the result of strong investment activity and sound credit policies. CFO Scott Lem underscored the importance of conservative debt management and a long-term commitment to delivering attractive returns to shareholders through stable dividends.

This quarter reaffirms Ares Capital's position as a leader among publicly traded BDCs, with an emphasis on sustainability, stability and shareholder value growth.

Revenue growth forecast

While earnings growth is probably the best indicator of a company's financial health, nothing happens if a business is unable to grow its revenues. In the case of Ares Capital, the consensus revenue estimate of $786.56 million for the current quarter indicates a year-over-year change of +11.3%. Estimates of $3.02 billion for the current and $3.13 billion for the next fiscal year suggest changes of +15.4% and +3.6%, respectively.

Analysts' expectations and outlook

Following the release of the third quarter results, analyst Kenneth Lee of RBC Capital reiterated his "buy" recommendation on shares of Ares Capital Corporation (ARCC) and slightly increased the target price to $23 from the original $22. He bases his optimistic view on the company's strong risk management performance through various economic cycles, well-covered dividends, and the benefits of the scale of its business.

However, Lee lowered his adjusted earnings per share (EPS) estimates for 2024 to $2.36 from the previous $2.39 and for 2025 to $2.13 from the previous $2.17. The move reflects adjusted portfolio earnings assumptions and changes in expected dividend income. Despite these reductions, Lee remains optimistic about the company's future prospects due to its solid credit performance and lower downside risk, which he attributes to the favorable macroeconomic environment.

The analyst also highlighted that the company's portfolio activity exceeded expectations in the third quarter. ARCC achieved a net increase in investments of more than $1.32 billion during the period, well above RBC's initial estimate of $800 million. The company also reported an improvement in its loan portfolio, with non-performing loans (NPLs) falling to 1.3% from 1.5% in the previous quarter.

Overall, Lee believes Ares Capital has the potential to deliver above-average returns on equity compared to its peers. Another important factor is the scale of its business, which he considers a competitive advantage.

Kenneth Lee is ranked 34th out of more than 9,100 analysts tracked by TipRanks. His recommendations have been profitable 70% of the time, delivering an average return of 17.2%.

Long-term results

The fluctuations in Ares Capital Corporation's (ARCC) results, despite operating in a relatively stable sector, can be explained by the nature of its business, external economic influences and specific strategic decisions. ARCC is a business development company (BDC), which means that it specializes in providing loans and investments to small and medium-sized businesses. While this business model is stable because companies need financing regardless of the economic cycle, revenues and profits can be strongly affected by changes in macroeconomic conditions, interest rates and the quality of the loan portfolio.

One of the main factors influencing volatility is changes in interest rates. ARCC generates a significant portion of its income from interest it collects from the companies to which it lends. If interest rates rise, the revenue from these loans tends to increase, but at the same time, ARCC's funding costs may increase if it borrows at higher rates itself. On the other hand, during periods of low rates, the difference between borrowing and lending rates (the so-called net interest margin) may be compressed, negatively affecting profitability.

Key indicators

A price-to-earnings (P/E) ratio of 8.72 indicates that the stock is trading at a relatively low price relative to earnings. This may be a signal that the market has not yet fully priced in the company's potential, or is affected by concerns about external factors such as changes in interest rates or economic cycles. However, compared to market averages, this is an attractive metric.

Another indicator that supports the perception of ARCC stock as a worthwhile investment is its price-to-book value (P/B) ratio of 1.08. This result suggests that the stock is trading close to its book value, which reduces the risk of overvaluation. The company therefore provides investors with a solid basis in terms of valuation of its assets. On the other hand, the price-to-sales (P/S) ratio of 5.70 indicates that the market values each unit of sales quite highly.

In terms of profitability, Ares Capital Corporation is well positioned. The return on assets (ROA) is 5.82%, which reflects the efficient use of assets to generate profits. This result is above average within the financing and investment sector, as these companies typically operate with a large volume of assets, which can detract from returns. The company performs even better in terms of return on equity (ROE), which stands at 13.09%. This value is indicative of efficient shareholder capital appreciation and provides attractive opportunities for long-term investors.

The return on invested capital (ROIC) of 15.37% is also a key indicator. This value underlines the company's ability to effectively use the funds invested in the business to achieve high returns. It is a strong indicator that the company's management is able to strategically allocate capital to ensure long-term profitability.

Fair price according to Bulios

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The information in this article is for educational purposes only and does not serve as an investment recommendation. The authors only present facts known to them and do not draw any conclusions or recommendations for the reader.

Investing can be risky if you approach it recklessly. Bulios does not know your financial situation and therefore does not give specific advice and tips in any way. Stock selection, strategy and portfolio construction is an individual matter, so always educate yourself and perform your own detailed analysis before buying a particular stock.