Ares Capital: This 9.1%-Yielding Top-Shelf BDC Just Raised Its Dividend

Summary

• Ares Capital Corp. reported Q2-2018 results on Wednesday.
• The BDC raised its dividend from $0.38/share to $0.39/share, reflecting an increase of 2.6 percent.
• Ares Capital Corp. still has considerable interest rate upside.
• Shares are affordable, selling for about net asset value.
• An investment in ARCC yields 9.1 percent.

Ares Capital Corp. (NASDAQ:ARCC), one of the largest BDCs in the country, reported solid second quarter results yesterday and raised its quarterly dividend payout. Ares Capital Corp. reported stable net investment income and continued to cover its dividend payout. The business development company also has positive interest rate sensitivity, which could translate into NII growth in a rising rate environment. Shares sell for about net asset value now, but the risk-reward is still attractive. An investment in ARCC yields 9.1 percent.

Ares Capital Corp. released a solid deck of financials for Q2-2018 yesterday that sent the stock up by more than two percent. The business development company pulled in $0.38/share in net investment income compared to $0.29/share in NII in the year-ago quarter. Q2-2018 NII was also in line with consensus expectations.

Here's a snapshot of the BDC's second quarter accomplishments.

Source: Ares Capital Corp. Earnings Release

Ares Capital Corp. covered its second quarter dividend payout with net investment income. In the last twelve quarters, Ares Capital Corp. pulled in $0.37/share in net investment income, on average, which compares against a stable dividend rate of $0.38/share.

Here are Ares Capital Corp.'s dividend stats of the last three years.

Source: Achilles Research

Defensively-Positioned Investment Portfolio With Upside

Ares Capital Corp. largely invests in first and second lien senior secured loans, which together accounted for 70 percent of the business development company's investment portfolio at the end of the June quarter. These kinds of loans are relatively secure and provide income investors with downside protection in case the U.S. economy slides into a recession or the borrowers run into financial trouble.

Source: Ares Capital Corp. Investor Presentation

Importantly, Ares Capital Corp.'s investment portfolio has upside potential due to the fact that the majority of its debt investments are floating rate. A rising rate environment, therefore, will support Ares Capital Corp.'s NII growth and could potentially yield another dividend hike.

Source: Ares Capital Corp.

Low Non-Accruals

Ares Capital Corp. largely has performing investments on the books. At the end of the June quarter, only 0.8 percent of its investments were on non-accrual status (based on fair value).

Source: Ares Capital Corp.

Balance Sheet And Debt

Ares Capital Corp. has a stable balance sheet. The BDC has about $11.5 billion in investments sitting on its balance sheet. Just as importantly, ARCC's net asset value has risen from $16.54/share to $17.05/share.

Source: Ares Capital Corp.

Ares Capital Corp.'s debt load is manageable. The majority of debt matures only after 2022.

Here's a debt overview.

Source: Ares Capital Corp.

Dividend Raise

Ares Capital Corp. yesterday handed shareholders a $0.01/share quarterly dividend raise, which is the first raise in its base dividend since Q3-2012. However, the BDC occasionally paid special dividends in the past.

Source: Ares Capital Corp.

Valuation

Ares Capital Corp.'s shares change hands for ~11.3x Q2-2018 run rate net investment income and ~1.01x net asset value.

In terms of price-to-book-value multiple, Ares Capital Corp. ranks about midfield in the BDC sector. Here's how ARCC compares against other major business development companies in the sector.

ARCC Price to Book Value data by YCharts

Your Takeaway

Ares Capital Corp. reported decent financial results for its second quarter. Most importantly, the BDC raised its quarterly cash dividend by $0.01/share to $0.39/share, reflecting 2.6 percent growth. Ares Capital Corp. also covered its dividend payout with net investment income last quarter and has a low amount of investments on non-accrual status (healthy investment portfolio). Further, interest rate upside and an affordable valuation speak for an investment in ARCC. Buy for income and capital appreciation.

If you like to read more of my articles and like to be kept up to date with the companies I cover, I kindly ask you that you scroll to the top of this page and click 'follow'. I am largely investing in dividend paying stocks, but also venture out occasionally and cover special situations that offer appealing reward-to-risk ratios and have potential for significant capital appreciation. Above all, my immediate investment goal is to achieve financial independence.

Analyst’s Disclosure: I am/we are long ARCC. 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.