Is Ares Capital Corp a Buy After Its Latest Earnings Report?

Ares Capital (ARCC) has recently faced scrutiny over its dividend sustainability following an earnings report that fell short of expectations. The business development company (BDC) reported a core earnings per share of $0.46 in Q3, down from $0.50 in the previous year. This was below its quarterly dividend payment of $0.48 per share.

However, the company's CFO, Scott Lem, emphasized that this was not an immediate cause for concern, as the company carries forward $1.37 per share of taxable income for distribution. Ares Capital CEO, Kort Schnabel, reiterated confidence in the current dividend level, citing the strength of the portfolio, market conditions, and the expected benefits from a recent acquisition.

The company recently announced a $2.6 billion acquisition of MidCap Financial Investment Corporation (MFIC), which is expected to be accretive to core earnings per share and supportive of future dividends. Once the deal closes, Ares Capital will have acquired all three of the largest BDCs in operation at its IPO more than 20 years ago.

Despite a 3% discount to its net asset value (NAV) per share, Ares Capital currently offers a yield of 10.2%, making it an attractive option for income-focused investors. The company's disciplined underwriting and growth in shareholder value have resulted in a NAV per share that has grown by more than 25% since inception. As long as Ares Capital can maintain its current dividend level, its diversified portfolio and pending acquisition make it a solid buy for those seeking a stable-to-growing income return.