Ares Capital Just Extended Its Dividend Streak to 17 Years — Here’s What Its Latest Earnings Show

Ares Capital (ARCC -1.73%) just reported its second-quarter financial results and declared its latest dividend payment. The business development company (BDC) maintained its current quarterly rate of $0.48 per share. That officially extended its streak to 17 years of dividend stability and growth. It’s one of the few BDCs that hasn’t cut its dividend over that period.

Here’s a look at what the BDC‘s earnings show about the safety of its more than 10%-yielding dividend.

Image source: Getty Images.

Another solid quarter

Ares Capital reported core earnings of $0.47 per share, flat with the first quarter and down from $0.50 per share in the year-ago period. That came in just below its quarterly dividend payment. While that might raise some concerns about dividend safety, it doesn’t mean a dividend cut is forthcoming.

Overall, Ares “reported solid second quarter results, supported by consistent core earnings, healthy portfolio performance and historically low levels of non-accruing loans and problem assets,” stated CEO Kort Schnabel in the earnings press release. However, it continues to experience a slower transaction environment, which is causing a bit of a drag on core earnings.

Today’s Change

(-1.73%) $-0.33

Current Price

$18.71

Key Data Points

Market Cap

$13BMarket cap calculated using publicly traded shares outstanding only. Does not include unlisted, private, or dual-class non-traded shares. Implied market cap may vary.

Day’s Range

$18.68 – $19.13

52wk Range

$17.40 – $22.86

Volume

6.8K

Avg Vol

5.1M

Gross Margin

78.21%

Dividend Yield

10.26%

Is the 10%-yielding dividend safe?

Ares Capital’s core earnings have fallen below its dividend for the second quarter in a row. However, that number doesn’t include any net realized gains. The company recorded a $0.15 per share net gain in the first quarter, followed by a $0.01 per share net loss in the second, for a total net gain of $0.14 per share this year. That gain, when added to its core EPS, has more than covered the dividend. Additionally, Ares Capital entered this year with ample spillover income from last year (it carried forward $1.38 per share of excess taxable income). These factors give it a more comfortable cushion than its core earnings initially indicated.

Meanwhile, the company’s scale, stable capital base, and long-standing borrower relationships allow it to continue making attractive investments, even as it remains selective in the currently slow environment. The company continued to raise capital to support its growth, including $1.2 billion of additional financing in the second quarter. That’s positioning it to grow its portfolio when opportunities arise. While it exited more investments than it committed to during the second quarter ($2.9 billion versus $2.6 billion), it has $6 billion in liquidity and modest leverage, putting it in a strong position to continue growing.

Ares Capital’s streak should continue

Even though Ares Capital’s core earnings remained below its dividend payment during the second quarter, it has built up a meaningful cushion to support its payment. Meanwhile, it’s in a strong position to grow its portfolio as the transaction environment reaccelerates. These factors suggest that Ares should be able to continue its long streak of dividend stability and growth. While it’s a higher-risk, high-yielding investment, its scale, track record, financial profile, and balance sheet make it much less risky compared to most other BDCs.