Ares Capital: A Bet On Business Development

Ares Capital (ARCC) is the largest Business Development Company — known as a BDC — with a $6.2 billion market cap. The firm had a good quarter, although lending activity (and associated fees) was muted, something the company expects to continue. In the event of a slow recovery, which it expects, then it would expect to see good opportunities at some point.

The liquidity of the companies in its portfolio is good, with 98% of interest being paid. The book value actually increased from the last quarter due to portfolio gains, even though there was a slight uptick in non-accruals.

Ares has a diversified portfolio, primarily in defensive sectors including healthcare and software, with none-to-little in highly exposed sectors such as travel. It has a strong balance sheet, with leverage at a modest 1.08 times. Net investment income more than covers the dividend, with a 93% payout ratio.

Moreover, it has large spillover income of 98 cents per share, representing virtually two and a half quarters of full dividend payouts, so it is unlikely there will be a dividend cut, at least not for the foreseeable future. Moreover, it has pre-funded its 2022 debt maturity.

The stock has recovered more than 50% of its March drop, and now trades just under book, with a yield just over 11%, including small special cash distributions. We are holding, and new investors can look to buy cautiously on declines.

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