Ares Capital Reports Solid Q2 Results, Valuation Appears Overvalued

Ares Capital reported a strong Q2 with a 2.9% total NAV return. The company trades at an 8.5% dividend yield. Despite a solid quarterly result, the valuation of ARCC is looking toppy.

Ares Capital Corp (ARCC) has reported strong Q2 performance, leading to an increase in its price target by Citizens JMP from $22 to $23, maintaining an "Outperform" rating. The company demonstrated resilience and stability despite a challenging market environment.

Key Financial Metrics

Ares Capital reported stable core earnings of $0.50 per share for the second quarter, consistent with the prior quarter. The company's net asset value (NAV) per share increased both sequentially and year-over-year, driven by robust net investment gains and earnings exceeding the dividend [1].

The company generated $117 million in net realized gains on investments during the second quarter, bringing the cumulative net realized gains since inception to nearly $900 million. Ares Capital's balance sheet remains strong, with a total portfolio value at fair value of $27.9 billion and liquidity of nearly $6.5 billion [1].

Portfolio Performance and Debt Issuance

Ares Capital's portfolio demonstrated strong performance, with borrowers' weighted average organic EBITDA growth rates accelerating into the double digits over the last 12 months. The company issued $750 million of long 5-year unsecured notes, achieving the tightest 5-year new issue spread by a BDC since the beginning of the second quarter [1].

Forward-Looking Guidance

Ares Capital provided solid forward-looking guidance, projecting stable core earnings of $0.50 per share and a GAAP net income of $0.52 per share for the second quarter of 2025. The company's NAV per share is expected to increase, driven by earnings exceeding their dividend and robust net investment gains [1].

Challenges and Resilience

While facing a modest increase in non-accrual rates and tariff-related volatility, Ares Capital managed to navigate these challenges effectively, demonstrating its resilience. The company's debt-to-equity ratio of 0.98x and a diverse portfolio position it well to capitalize on emerging market opportunities [1].

Price Target and Rating

Citizens JMP has increased its price target for Ares Capital Corp from $22 to $23, maintaining an "Outperform" rating. The company's stable core trends and focus on debt and equity investments have contributed to this positive outlook.

Valuation and Dividend Yield

Ares Capital continues to perform well. The Q2 total NAV return of 2.9% was above its 2.1% figure in Q1 but below the prior two quarters. The company's valuation remains elevated relative to its own history, trading not far off its highest valuation relative to the sector average. However, on a performance basis, it's not far off fair value [2].

The current dividend yield for Ares Capital is 9.99%, with an annual dividend of $1.92 paid quarterly. The next quarterly dividend payment of $0.48 per share is scheduled for September 29, 2023 [3].

References

[1] https://www.ainvest.com/news/ares-capital-q2-performance-drives-price-target-increase-23-citizens-jmp-2508/
[2] https://seekingalpha.com/article/4811135-ares-capital-solid-q2-result-valuation-looking-toppy
[3] https://www.marketbeat.com/stocks/NASDAQ/ARCC/dividend/