Ares Capital is the type of investment your broker or financial advisor would never recommend. The reason is simple: most of them don’t understand business development companies, and if they do, they are very fearful that an economic downturn could result in a serious decline in the investor’s assets. It is easier for financial advisors to avoid REITs and BDCs because of the volatility that creates fear, uncertainty, and doubt. I understand BDC’s, so I am not fearful of investments like GAIN, ARCC, and MAIN.
Cindie and I own a combined total of 4,400 shares of ARCC, so those shares are currently worth about $85,700. I first started buying shares of ARCC in September 2018. In the less than three years we have owned shares, we have received $13,515 in dividends. So, while our shares are only “worth” $85K, the dividends are a big part of the overall gain. To put this another way, I expect to see a total of $7,040 in dividends from our ARCC investment in 2021.
Why Does ARCC Qualify for the TOP TEN?
ARCC is not, as the song for Sesame Street proclaims, “not like the others.” But in many aspects, it is similar to GAIN and MAIN. These are powerhouse financial firms that give me entry into businesses I would otherwise be unable to purchase. ARCC’s dividend is covered by earnings per share and the P/E ratio is not a nose-bleed number. The current PE (FWD) is 11.48. The yield is currently 8.24%.
Because of this high yield, I do not generally recommend ARCC for most of the novice investors who come to me for advice. I’m more inclined to suggest GAIN or MAIN and only a relatively small position. However, with $7,040 in dividends, we can buy a lot of flowers for Cindie’s gardens, pay for home improvements, and continue our desire to increase our charitable giving. We can’t (and won’t) take it with us.
If you look at the following image you should notice four aspects of ARCC’s diversification. The first two have to do with the mechanics of the lending and types of loans. The third is related to a nice diversification into sixteen sectors of the economy. The fourth reveals a nice mix of investments throughout the USA along with a slice of international business. As ARCC proclaims on their investor web page, “We seek to originate investments in market-leading companies with a history of stable cash flows, proven competitive advantages and experienced management teams.” Cash flows to us in dividends.
Here is another slice from their investor page: “As of March 31, 2021, Ares Capital Corporation’s (“Ares Capital” or “ARCC”) portfolio had a fair value of approximately $15.4 billion, and consisted of 350 portfolio companies backed by 176 different private equity sponsors. Ares Capital has a diversified portfolio in terms of issuer concentration, asset class, industry sector and geographic representation.” So ARCC is a buy-and-hold income champion in our top ten.
Our Other Financial Investments
One of the nice things about the financial sector is the variety of business types. There are banks, insurance companies, business development companies, mortgage lenders, and investment banking and brokerage businesses. As a result, we have a heavy weighting in the financials.
ETN’s Sector, Industry, and Market Cap
Sector: Financials (Business Development Company)
Industry: Asset Management and Custody Banks
Market Cap: $8.49B
Headquarters: New York, NY, founded in 2004
Company Profile (Note the last sentence!
Ares Capital Corporation is a business development company specializing in acquisition, recapitalization, mezzanine debt, restructurings, rescue financing, and leveraged buyout transactions of middle market companies. It also makes growth capital and general refinancing. It prefers to make investments in companies engaged in the basic and growth manufacturing, business services, consumer products, health care products and services, and information technology service sectors. The fund will also consider investments in industries such as restaurants, retail, oil and gas, and technology sectors. It focuses on investments in Northeast, Mid-Atlantic, Southeast and Southwest regions from its New York office, the Midwest region, from the Chicago office, and the Western region from the Los Angeles office. The fund typically invests between $20 million and $200 million and a maximum of $400 million in companies with an EBITDA between $10 million and $250 million. It makes debt investments between $10 million and $100 million The fund invests through revolvers, first lien loans, warrants, unitranche structures, second lien loans, mezzanine debt, private high yield, junior capital, subordinated debt, and non-control preferred and common equity. The fund also selectively considers third-party-led senior and subordinated debt financings and opportunistically considers the purchase of stressed and discounted debt positions. The fund prefers to be an agent and/or lead the transactions in which it invests. The fund also seeks board representation in its portfolio companies.