As of June 2015, Ares Capital’s (ARCC) stock declined by ~5% over the past 12 months. The company paid a dividend of $0.38 per share—at par with the dividend paid the year before. With an ~9.5% dividend yield and improving yields on its portfolio, it can provide better returns to its shareholders over the next few quarters. Here’s how some of these companies’ dividend yields compare:
- Apollo Investment (AINV) – 10.4%
- Prospect Capital (PSEC) – 13%
- BlackRock Capital Investment (BKCC) – 9.8%
Together, these companies form 4.76% of the PowerShares Global Listed Private Equity Portfolio (PSP).
Ares Capital’s marginal improvement in the net asset value, combined with stable investment income, has provided good support for its stock price.
Currently, Ares Capital is trading at 8.9x on a one-year forward earnings basis. Its peers are trading at 8.8x.
Historically, the company has traded at par or 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 that invest in debt with a lesser leveraged balance sheet.
Overall, the market has been experiencing some yield compression over the past two years. Considering the difficult market conditions, Ares Capital is improving its average yield by investing in the second lien debt of companies with a strong earnings profile. This has resulted in marginal improvement of an average yield on the portfolio. If the company can result in better originations in the upcoming quarter with a similar or better yield profile, then it can result in higher investment and distributable income for the shareholders.