As of June 2015, Ares Capital’s (ARCC) stock had fallen by ~6% in six months. The company paid a dividend of $0.38 per share—at par with the dividend paid the year before. With a ~9.5% dividend yield and improving portfolio yields, it may provide better returns to its shareholders over the next few quarters. Here’s how some other companies’ dividend yields compare:
Together, these companies form 1.36% of the Financial Select Sector SPDR Fund (XLF).
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Ares Capital’s marginal improvement in net asset value, combined with stable investment income, has provided good support for its stock price.
Currently, Ares Capital is trading at 10.1x on a one-year forward earnings basis. Its peers are trading at 8.7x. Historically, the company has traded at a premium to its peers because of its quality portfolio and strategic partnership with GE Capital. The market tends to give a higher premium to investment management companies investing in debt when they have a less leveraged balance sheet.
Investment management firms have experienced some yield compression over the past two years stemming from the low-interest-rate environment. Recognizing the difficult market conditions, Ares Capital has improved its average yield by investing in the second lien debt of companies with strong earnings profiles. The firm’s portfolio average yield has marginally improved as a result.
If the company can improve originations in the upcoming quarter with a similar or better yield profile, then shareholders may see higher investment and distributable income. Its recent joint venture with Varagon Capital Partners and AIG (AIG) will also provide Ares Capital with a strong platform for new originations.