High payouts

As of October 2016, Ares Capital (ARCC) stock has risen ~9.0% over the past three months. In the June quarter, the company posted strong numbers, marginally lower yields, improved SDLP (Senior Direct Lending Program), and a definitive agreement for the acquisition of American Capital (ACAS).

Ares Capital has suspended share repurchases due to the American Capital acquisition. However, it paid a dividend of $0.38 per share, which was in line with the prior year’s dividends.

Ares Capital’s Valuations Are High on the Acquisition

Dividends paid translate to a yield of 9.8%, which is at par with payouts for its peers. Here’s how some of Ares Capital’s peers compare in terms of dividends:

  • Prospect Capital (PSEC): 13%
  • BlackRock Capital Investment (BKCC): 9.8%
  • Blackstone Group (BX): 7.2%
  • KKR (KKR): 8.0%

Together, these companies form 6.3% of the PowerShares Global Listed Private Equity ETF (PSP).

Valuations rise

Currently, Ares Capital is trading at 9.7x on a one-year forward earnings basis. Its peers are trading at 8.6x. The valuation gap has fallen since the company’s peers have produced strong results on diversification toward multiple methods of origination as well as end markets.

Historically, Ares Capital has traded at a premium to its peers due to its quality portfolio and strategic partnerships. The market gives premium valuations to companies with lower leverages and high-quality portfolio investments.

Ares Capital’s yields fell in the June quarter due to the deployment of its SDLP portfolio. The company is expected to see this continue for the current and upcoming quarters.

Ares Captial’s recent joint ventures with Varagon Capital Partners and American International Group (AIG) can help in the development of strong investment platforms. However, these ventures can also result in some pressure on yields, as they’re mandated to deploy funds in first lien loans.

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