Could Ares Capital's Shares Generate Millionaire Statuses?
Unleashing the Millionaire-Maker Potential: A Deep Dive into Ares Capital (ARCC)
Ares Capital (ARCC 1.53%)*, a prominent business development company (BDC) renowned for its sizeable dividend payouts, hit the public arena in October 2004, priced at a humble $15 per share.* Since then, its ascent has been moderate, with a nominal rise of about 45%, but the real magic unfolds when we factor in its reinvested dividends. Over this period, a $10,000 investment in its IPO would have ballooned to a staggering $119,000, generating an astounding $10,450 in annual dividends.Though it may not have minted millionaires on its own, we ponder whether this sturdy dividend stock could churn millionaire-making gains from a fresh $10,000 investment over the next two decades, or if it'll remain a reliable income generator for conservative investors.**
The Secret Ingredients: How Ares Capital Cakes Its Cash
As a BDC, Ares Capital extends direct loans to the "middle market" companies, annually raking in $10 million to $250 million in earnings before interest, taxes, depreciation, and amortization (EBITDA). These companies frequently find trouble securing loans from traditional banks due to their higher-risk profiles, but they're often too small to capture the interest of bigger private investors or venture capital firms. Ares Capital usually invests between $30 million to $500 million in both debt and equity in each company.**
Ares Capital accepts more risk than traditional banks but justifies this by charging higher interest rates. Its floating-rate loans typically mirror the Federal Reserve's benchmark rate, meaning elevated interest rates often amplify its net income. However, sudden spikes in rates can slow its growth by making loans less appealing.**
Over the last two decades, Ares scaled its operations through a series of acquisitions, gobbling up firms like Allied Capital, Area Property Partners, Energy Investors Funds, American Capital, SSG Capital Holdings, Landmark Partners, Black Creek Group, and AMP Infrastructure Debt. These acquisitions expanded and diversified its portfolio, which is currently distributed across 550 companies.**
At the end of 2024, Ares Capital's portfolio boasted a substantial fair value of $26.8 billion, making it the world's largest BDC. Its closest competitor, Blue Owl Capital, had a comparatively meager portfolio of 227 companies with a fair value of $13.2 billion at the same time.**
Riding the Rollercoaster: The Ares Capital Growth Chronicle
We can generally assess a BDC's health by examining its net assets per share and debt-to-equity ratio. From 2004 to 2024, Ares Capital's year-end net assets per share climbed from $14.43 to $19.89, as it expanded its portfolio. Its debt-to-equity ratio rose from 0.38 to 0.99, as it issued more loans, but its total liabilities have yet to surpass its shareholder equity.**
As a BDC, Ares Capital is duty-bound to disburse at least 90% of its pre-tax profits as dividends to maintain a favorable tax rate. It doesn't always hike its dividend annually, but it has boosted its annual payout from $1.30 per share in 2005 to $1.92 per share this year. This equates to a hefty forward dividend yield of approximately 8.8% at its current price.**
Analysts expect Ares Capital's core EPS to decline 7% to $2.16 per share in 2025, as interest rates gradually dip. Despite this anticipated dip, it should still comfortably cater to its dividends. At $22 per share, Ares Capital appears like a steal, priced only around 10 times this year's core EPS.**
Ares Capital: The Millionaire or the Steady Dividend Stock?
Assuming Ares maintains its conservative approach and continues expanding at a comparable rate over the next two decades, it could replicate its 1,090% total return since its IPO. However, it might not single-handedly catapult $10,000 into $1 million. Still, it undoubtedly remains a reliable stock capable of routinely surpassing the market with its outstanding total returns.
- By 2045, an initial $10,000 investment in Ares Capital could potentially grow significantly, given its historic performance, even though it may not create a millionaire directly.
- As a result of its aggressive acquisition strategy, Ares Capital's portfolio currently supports over 550 companies, making it the world's largest business development company (BDC).
- In the event of rising interest rates, Ares Capital's floating-rate loans could potentially amplify its net income, but such increases may also slow its growth by making loans less appealing.
- Diversified through several acquisitions, firms like Landmark Partners and Black Creek Group are now part of Ares Capital's extensive portfolio, contributing to its overall growth and stability.