Is it advisable to invest in Ares Capital stock as it currently trades below $25?
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In the world of large-cap, ultrahigh-yield dividend stocks, Ares Capital (ARCC) stands out with a relatively low share price and a portfolio heavily weighted towards senior secured loans, making it a potential attractive buy for investors.
Dividend Yield and Stability
ARCC offers a high forward dividend yield of around 8.6% to 8.95%, backed by stable to growing dividends for over 63 consecutive quarters. As a Business Development Company (BDC) mandated to distribute at least 90% of its income, ARCC's dividend yield reflects solid income generation.
Valuation
The stock is attractively valued with a forward price-to-earnings (P/E) ratio near 10.7 to 11.2, which is low compared to the broader market and indicates it may be undervalued.
Market Leadership and Growth
ARCC is one of the largest and most respected direct lenders in the middle-market private credit space, active in diverse sectors with broad origination coverage. It recently closed a record-setting lead private credit deal and showed accelerating pipeline momentum and capital deployment capacity, with quarter-end liquidity of nearly $6.5 billion.
Analyst Sentiment
Analysts rate ARCC as a "Buy" or "Moderate Buy" with consensus price targets around $22.85 to $23.00, slightly above current prices.
Financials
Revenue grew about 14.4% year-over-year to near $3 billion, with net income steady, supporting earnings in excess of dividends and strong net investment gains.
Risks to Consider
Idiosyncratic increases in non-accrual loans (though still below sector averages) and some tariff risk exposure, albeit low, are potential risks to consider. One-year price forecasts suggest modest potential downside to around $21, reflecting some volatility or market pressure.
Conclusion
With its ultrahigh dividend yield, combined with a leading position in a fast-growing industry, ARCC's price is considered right for this outstanding BDC stock. The private credit market, where BDCs like Ares Capital operate, has nearly tripled over the last decade to around $2 trillion, with projections from Morgan Stanley estimating it will grow to $2.8 trillion by 2028. McKinsey estimates that the total addressable market for private credit could top $30 trillion in the U.S. alone.
ARCC’s compelling dividend, leadership in an expanding private credit market, stable financials, and attractive valuation support the case for it being a good buy at current levels slightly below $25. However, investors should weigh its risks and dividend sustainability carefully and consider their income and risk tolerance.
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