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10%-Yielding Ares Capital: When Bad News Is Good News

Nov. 03, 2022 8:05 AM ETAres Capital (ARCC)19 Comments


  • News of continued rate hikes from the Federal Reserve caused stocks to drop, but this is actually good news for Ares Capital.
  • ARCC's investment portfolio is majority weighted towards floating rate debt instruments.
  • Management just raised the dividend and the stock's valuation looks appealing for income investors.
  • Looking for a portfolio of ideas like this one? Members of Hoya Capital Income Builder get exclusive access to our subscriber-only portfolios. Learn More »

Good news. Sign, speech bubble, text in yellow and dark green against a brick wall.

Torsten Asmus/iStock via Getty Images

Market volatility seems like an understatement these days, especially considering the 800 point swing in the Dow Jones Industrial Average on November 2nd, when the market first reacted on optimism only to be disappointed later when

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I am Gen Alpha. I have more than 14 years of investment experience, and an MBA in Finance. I focus on stocks that are more defensive in nature, with a medium- to long-term horizon.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of ARCC either through stock ownership, options, or other derivatives. 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.

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Comments (19)

winthorp profile picture
I started a position at $19.05 the day the secondary priced.
My research indicated that since ARCC came public it has not cut the dividend including the GFC.
The dividend increase obviously indicated mngt’s view of arcc’s portfolio. Yes the macro could deteriorate further and non-accruals could move up but I believe $17’s would be the low as ARCC is benefitting from rising rates and a large part of its portfolio floating. This market is a ways from bottoming and a portfolio of solid dividend payers like ARCC, glp, epd, tpvg - all attractive fundamentally.
Lewis Winthorp III
Scott Kennedy does exemplary work on BDCs. He has a strong buy rating and $22 price target on this name and likes FSK as well. The latter reports 11/7 and, like ARCC, is likely to reveal good news. In this tough environment, these are my two largest holdings.
CincinnatiRick profile picture
I did well riding ARCC as it digested ACAS but it hasn't inspired since and I stepped away in favor of Fidus and Hercules. Wouldn't hesitate to get back in if the price is right. Not yet...
@CincinnatiRick might have missed it, but then that’s timing!
papaone profile picture
I agree that the floating rates will benefit as Fed funds rate go up. However, will the debtors (businesses) have increased financial difficulty and the non-accruals will increase and nullify the gains on rate increases?
I'm long ARCC and FDUS to only two really great BDC's. I'll add to my positions when I can see how this market for BDC's will change or not.
Added a little more yesterday.

Retired income investor
Code Talker Market Analysis profile picture
Did you go through the Great Recession? If you did, you'll realize that BDC floating rate loans caused portfolio investments to go on non-accrual when the portfolio companies not only couldn't pay the increased interest but also had suffering businesses due to the recession. This triggered bank covenants on some BDCs which forced them to halt their dividend payments. BDC prices got slashed. It was a great time to be a buyer, but not good to hold.

I'm questioning when/if I sell and buy back in later.

ARCC is best of breed and survived the GR in flying colors, but it doesn't mean they won't be affected.
xrmfgk profile picture
@Code Talker Market Analysis Exactly. Why do SA writers only see the potential upside of floating rates in a rising rate environment (that is pushing the economy into a deep recession). We'll see in 1H2023, which is when I am looking to buy ARCC.
Income4ever aka Cyclenut profile picture
I think in most cases, quality BDCs have significantly improved underwriting standards since the GFC so those issues should in theory, repeat theory, be minimal this time around....
Code Talker Market Analysis profile picture
@Income4ever aka Cyclenut Hopefully, but you also get to see who's swimming naked. ARCC has a bathing suit on, but it will still be choppy waters.
The higher interest rate forecast is good news until its not. They are walking a tight rope where if rates get too high then defaults are going to rise and NAV will fall. Their credit quality is better than most of the peers so they are probably one of the best protected from defaults growing faster than the increase in interest payments.
If price targets worked all of the time we would all be multi-millionaires.
I will say ARCC is a good investment though,,,
21?? Who knows....
Price targets and folks who come up with them can be held accountable if they were to give you a specific time frame.,.
Funny how this will probably not happen..
@FunInvesting I own it and like it a lot better @ $17 and will buy again there on down, not before.
elliot_mllr profile picture
It's a very strong 9.8% yield.
Elliot Miller
Started a position in 2018 with invested dividends at $16 and added to this position this year when the stock price dipped below $17.00. Have increased my shares by 43%. Great company with a Hefty dividend
Income4ever aka Cyclenut profile picture
Good commentary
I don't consider ARCC a strong buy at current levels ...
Under $17.50 definitely..... $17.55 to 19.50 a buy ... hold after that
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