This 10% Yielding BDC Is Worth Looking At

| About: Ares Capital (ARCC)

Summary

Ares Capital reported $0.36/share in net investment income, or NII, for the first quarter.

ARCC is selling for ~10.6x run-rate Q1-16 NII, while its shares are coming with a 10 percent dividend yield.

Stable Net Asset Value makes ARCC a business development company of choice.

I am shortlisting ARCC for my $100,000 high-yield income portfolio.

Though I haven't covered Ares Capital Corp. (NASDAQ:ARCC) as much as other business development companies here on Seeking Alpha, the BDC remains one of my top BDC picks for high-yield income investors. A year ago I decided to buy a sizable position of business development company Prospect Capital Corp. (NASDAQ:PSEC) for my $100,000 high-yield income portfolio largely because of Prospect Capital's wide discount to Net Asset Value and appealing dividend income, but passed over Main Street Capital Corp. (NYSE:MAIN) and Ares Capital Corp. That being said, though, I have put Ares Capital Corp. on the shortlist for my $100,000 high-yield income portfolio due to its high net investment income and fair valuation.

Like other business development companies, Ares Capital has released first quarter earnings lately that supported my bullish case.

Defensible Valuation, Stable Net Asset Value

Ares Capital said that it pulled in first quarter net investment income of $112.7 million, $0.36/share whereas a year ago the business development company earned $121.7 million, $0.39/share. Based on Ares Capital's run-rate net investment income, or NII, the business development company's shares sell for ~10.6x Q1-16 annualized NII. Based on Ares Capital's LTM net investment income of $1.60/share, ARCC sells for ~9.5x LTM NII. Again, not too expensive considering that Ares Capital's Net Asset Value has remained stable, in a difficult market environment for business development companies in 2015/6.

Further, Ares Capital's Net Asset Value has actually increased $0.04/share compared to the last quarter. That's not great in and of itself, but Ares Capital was one of very few business development companies in the first quarter that reported an increase in its accounting book value whereas most BDCs saw their Net Asset Values slide.

At the end of the March quarter Ares Capital's Net Asset Value was $16.50/share. Since ARCC is selling for $15.26 at the time of writing, investors can buy the business development company's shares for 92 cents on the dollar.


Special Dividend Potential

One thing that separates good BDCs from 'run-of-the-mill' BDCs is their potential to pay a special dividend.

Special dividends are, of course, the result of a strong loan performance and high net investment income. Ares Capital has managed to pay a special dividend amounting to $0.05/share every once in a while, which significantly enhances Ares Capital's dividend profile.

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Your Takeaway

Ares Capital Corp. has earned my respect by keeping its Net Asset Value fairly stable over the last four quarters, a time when many business development companies came under growing pressure from the energy price rout and the market slide at the beginning of the year.

That being said, though, Ares Capital looks like a promising income alternative to other business development companies: The BDC sells for ~10.6x Q1-16 run-rate NII and comes with a 10 percent dividend yield. Importantly, Ares Capital has potential to pay a special dividend if net investment income allows it, making the business development company an income vehicle of choice for dividend investors. I am placing Ares Capital on the shortlist for my $100,000 high-yield income portfolio. Buy for income and capital appreciation.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.