Ares Capital (ARCC) is one of our high-yielding holdings; the company is boosting distributions and the stock is a good long-term holding for income-oriented investors, suggests Adrian Day, editor of Global Analyst.
The firm — a business development company (BDC) — reported record core earnings for the quarter and year, as well as its strongest origination of new loans in its history, with the annual rate double that of 2020 and 2019.
Increasingly, Ares is investing in more larger companies, and despite the increased competition, continues to take market share. With a net debt to equity ratio of just 1.2x and $4.8 billion in cash and available credit, Ares is positioned to continue to take advantage of opportunities.
Despite the increase in the average size of its investments, it is well diversified, with its largest 10 investments accounting for less than 11% of the portfolio.
Its portfolio companies are performing well, with a decline in loans on non-accrual, leading to a 12% increase in NAV. As a result of the strong performance and the high undistributed income (an increase over the 2020 level now equal to $1.30 per share), Ares increased its quarterly dividend, for the second time in the past year, and said it intends to pay a bonus dividend each quarter this year.
One might expect a reduction in new investment activity this year, since there was a burst of activity last year as people came out of lockdown and resumed more normal business activity. But we would still expect a reasonably active year, and a maintenance in the credit profile of its companies.
Ares stock has been very strong over the past year, trading at 1.15x NAV, a premium which used to be unusual for BDCs. The forward yield is over 8%. If you do not own, or are wanting to increase your exposure to quality income investments, it can be bought here.
