ARCC - Ares Capital: Strong Performance And Low Leverage Signal Higher Dividends

2024-05-24 16:35:00 ET

Summary

• Ares Capital continues to report strong earnings compared to its dividend.
• The company has low leverage and strong core earnings of $0.59 per share.
• Results are driven by an attractive investment environment and higher base rates plus credit spreads.

Ares Capital ( ARCC ), a very large business development corporation ('BDC'), continues to report stellar earnings when compared to the size of the dividend. We publish extensively about Ares, in large part because this is by far our largest BDC holding. Ares, in a simple description, thrives on two market conditions, demand strength, or the economy and interest rates. The company employs a lot of floating rate loans with spreads tending to increase under higher rates. In our last article published at the end of February, Looking At Ares Capital's Financials Under Lower Interest Rates , we explored earnings at lower interest rates expecting that sometime next year. In our view, Federal Reserve rate cuts are coming, but when is unknown. We concluded that even under much lower rates, the company generates enough earnings to pay the $0.48 dividend going forward. We rated the stock a buy with yields above 9.0% significantly higher than our target for income-paying entities. But management continues its cloak of secrecy with regard to increased dividends....

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