Here’s Why Ares Capital Stock Is a Buy Before July 29

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Ares Capital, recognized as the leading Business Development Company (BDC) globally, presents a dependable investment opportunity for income enthusiasts. Its impressive projected dividend yield of 8.7% is nearly twice that of the 10-Year Treasury’s return at 4.4%, and its share price has grown by 11% in the past year.

In simpler terms, potential investors might find the high returns intimidating, but Ares’ profits are more than sufficient to meet and exceed their dividend payments. Moreover, given that its next financial report is due on July 29, it could present a valuable investment opportunity for five compelling reasons.

1. It has a resilient income-generating business model

Business Development Companies (BDCs) provide funding to medium-sized businesses that frequently find it challenging to obtain loans from conventional banks due to their perceived higher risk status. These businesses often fail to garner the attention of private equity firms and other investors because they are relatively small in size.

BDCs (Business Development Companies) offer higher interest rates compared to conventional banks due to the additional risk they assume. Similarly to Real Estate Investment Trusts (REITs), they are obligated to distribute at least 90% of their taxable earnings as dividends, which helps them maintain a lower tax rate. This characteristic makes BDCs more dependable income-producing investments compared to traditional bank stocks.

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2. It diversifies its portfolio to offset its risk

Ares typically focuses on businesses that have an annual EBITDA (earnings before interest, taxes, depreciation, and amortization) between 10 million and 250 million dollars. Their investment range for a single company usually falls between 30 million and half a billion dollars, covering both debt and equity.

To mitigate this risk, the management diversifies its investments by spreading them across 566 businesses supported by 245 unique private equity sponsors, within a $27.1 billion portfolio. To ensure priority in potential bankruptcy situations, Ares dedicates approximately 58.6% of its portfolio to first-lien secured loans (meaning it takes precedence for repayment), while also investing 5.7% into second-lien secured loans and 5% into senior subordinated debt.

It’s crucial that diversification shields it from major economic slumps. This is evident in its impressive total return of 934% over the past two decades, despite numerous global economic turbulences such as the Great Recession, the COVID-19 recession, and other financial crises.

3. It will benefit from stable interest rates

As an observer, I note that Ares manages floating-rate loans tied to the Federal Reserve’s interest rates. For this company to continue expanding, interest rates need to remain in a “Goldilocks zone” – not too high and not too low. If rates increase, it would yield higher interest earnings, but it might negatively impact the companies within its portfolio and make its dividend-paying shares less appealing compared to risk-free, fixed income investments such as Certificates of Deposit (CDs) and Treasury bills. Conversely, lower rates would facilitate growth among its portfolio firms and potentially draw more income investors towards its stock. However, this scenario would decrease its interest income.

Last year, the Federal Reserve lowered its key interest rate on three occasions, leading many investors to predict at least two additional rate reductions this year. Financial analysts foresee these cuts causing Ares’ earnings per share (EPS) to decrease by approximately 13% to $2.02 in 2025 and an additional 1% to $2 in 2026. Despite this projected decline, Ares remains capable of comfortably distributing its forecasted annual dividend of $1.92 per share for the upcoming period.

The short-term earnings could experience variations due to changing interest rates, but they are expected to become more consistent in the long run once these rates find a stable and foreseeable level.

4. It looks reasonably valued relative to its net assets and earnings

Between 2021 and 2024, Ares’ end-of-year net asset value (NAV) per share increased from $18.96 to $19.89. In the first quarter of 2025, its NAV climbed by 1.5% compared to the previous year, amounting to $19.82 per share. This consistent growth suggests a robust health of their underlying investment portfolio.

Priced slightly above its net asset value (NAV) per share, it trades at approximately 11 times the estimated earnings for this year. With these moderate valuations, its risk of significant price drops is likely to be minimal, even if reduced interest rates temporarily affect its short-term profits.

In their recent financial quarter, Ares’ main rival, Blue Owl Capital (OBDC), reported a Net Asset Value (NAV) of $15.14 per share. This figure is quite near to Blue Owl’s current market price of $15, and it operates at less than ten times this year’s earnings.

While it may appear less expensive compared to Ares, it should be noted that its portfolio is significantly smaller, managing only $17.7 billion across 236 companies. Given this, I suspect that investors are prepared to shell out a bit more due to Ares’ advantageous larger scale and wider diversification.

5. Its debt levels are decreasing

To put it simply, Ares’ outstanding debts have been decreasing steadily. The debt-to-equity ratio (after accounting for available cash) has significantly reduced from 1.21 at the close of 2021 to 0.99 by the end of 2024. In the first quarter of 2025, it further dropped slightly to 0.98.

The enhancements were primarily due to restructuring its long-term debts at lower interest rates, issuing additional unsecured corporate bonds to manage upcoming maturities, decreasing reliance on the revolving credit facility, and boosting its cash reserves. Notably, this ratio is significantly lower than Blue Owl’s debt-to-equity ratio of 1.26 during the first quarter of 2025.

Showing prudent financial management suggests that Ares isn’t impulsively accumulating debt for portfolio expansion. Thus, if you’re seeking a reliable, high-dividend stock for a long-term investment, it could be advantageous to purchase Ares shares before its upcoming earnings release.

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2025-07-22 10:45