Ares Capital Corporation (NASDAQ:ARCC) is based in Maryland where it focuses on its management investment strategy. The company operates as a business development company and is a subsidiary of Ares Management (NYSE:ARES). The investment objective of Ares Capital is to generate current as well as create opportunities for capital appreciation through debt and equity investments. Ares invests primarily in mid size companies with EBITDA between $10 and $250 million, as these companies tend to offer the most in returns on capital. The loans to these businesses are secured first lien loans in most scenarios to help protect the investment.
Is Ares Capital A Buy?
Ares Capital does not necessarily receive as much attention as many feel it deserves, but the attention it does receive is due primarily to their high dividend payout of around 9%. The company does offer some competitive advantages that help it stand out in addition to potential catalysts that could lead to potential upside in the price movement of the stock. The Ares platform of around $74 billion in assets under management allows access to origination and marketing for Ares Capital that is unmatched in the marketplace. The management team at Ares has vast experience in identifying and executing on potential investment opportunities in their target market of midsized companies. Their disciplined investment management approach helps reduce downside risk by engaging in extensive due diligence and maintaining their investment criteria standards on an ongoing basis.
Reasons To Buy
Previously I mentioned some potential market catalysts that could lead to some upside potential in the price of the stock. Although the primary reason that many own Ares is for the dividend income, the current environment appears to favor potential capital appreciation as well. The credit crisis in 2008-2009 may seem like a long time ago now, but the effects on this crisis are still ongoing. As a result competition in this particular market has decreased, opening the doors for more opportunities for Ares. Another potential catalyst is that larger investment banks and institutions have recently reduced their willingness and emphasis on investing in midsized firms, focusing primarily on larger investments. Increased regulatory requirements have also hindered the ability of larger investment banks to steal business from Ares.
Time To Pull The Trigger?
It appears that now may actually be a good time to pull the trigger on Ares Capital. Although it is not a highly covered stock it does have strong growth potential long term, and also provides great current income. It is no secret that over long periods of time dividend paying stocks tend to perform well for one's portfolio and Ares may be a great addition to your collection. The current valuation shows a Price To Earnings To Growth (PEG) ratio of around 1.2, which is respectable. The current dividend yield is 8.9%, which is above industry average. The stock is down about 4% for the year, but Ares has seen significant growth over the past five years, not even factoring in the dividend. The stock seems to trade in the teens and with the recent decline it may be worth dollar cost averaging your way into some shares.
On the short term it is difficult to predict the price movement of the stock, but Ares may be a good long term play that will continue to pay you dividend income while the capital appreciation hopefully takes care of itself.
This article is given for informational purposes only and is not to be construed as investment advice. Contact your investment professional and do your own due diligence before investing.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.