After a strong performance last year, the largest publicly-traded business development company (BDC) looks ready to challenge its all-time high set in 2022. New York-based Ares Capital Corp. (NASDAQ:ARCC) also offers a tremendous dividend yield, which is why I’m bullish on the stock in 2024.
Last year saw the market rebound after a disastrous 2022. The S&P 500 (SPX) closed out 2023 with a robust 24% gain. However, much of that was on the back of the so-called Magnificent Seven — a group of Big Tech stocks that drove a significant portion of the S&P’s yearly gains, mainly caused by the frenzy in artificial intelligence.
While that news was warmly welcomed by growth investors, most tech stocks don’t pay dividends. Meanwhile, many dividend-paying household names failed to produce steady gains in conjunction with their reliable yields, resulting in a slew of income investors being left behind.
Dividend Kings (stocks have increased their dividends for at least 50 consecutive years) such as Coca-Cola (NYSE:KO), Altria Group (NYSE:MO), and 3M (NYSE:MMM) fell by 2.32%, 18.95%, and 39.25%, respectively. But while these blue-chip stocks failed to produce returns, one lesser-known company with an eye-catching dividend was providing shareholders with a better performance and a better yield. Based on the analyst consensus, that trend is poised to continue in 2024.
A Leader Among BDCs
Ares Capital ended 2023 in the green, closing out the year with a gain of over 7% (not including dividends) and posting its 52-week high in the final month. While that return doesn’t match the strong year the S&P 500 had, with a yield of 9.4%, ARCC’s dividend dwarfs that of those offered by index funds that track the S&P, like the 1.4% shareholders receive from the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
While that may lead some to believe the company’s yield is a dividend trap aimed at luring in yield-chasing investors, that couldn’t be further from the truth. Established in 2004, the company has a track record of sound fundamentals and has even seen its long-term debt decrease 5.7% from 2022 to 2023, from $12.2 billion to $11.5 billion.
Further, its total assets grew from $8.9 billion in March 2015 to $22.9 billion in September 2023, good for an increase of over 61%. Annual net income has experienced similarly explosive growth, climbing from $379 million in 2015 to $600 million in 2022, and net income on a trailing-12-month basis was $1.28 billion as of the end of Q3 2023.
Operating in the financial sector, Ares Capital provides financing solutions to middle-market companies primarily through debt and equity investments. The trade-off of investing in BDCs is often assuming elevated risk in exchange for strong yields. However, according to its company website, ARCC aims to invest specifically in “market-leading companies with a history of stable cash flows, demonstrated key differentiators and experienced management teams.”
For this and other reasons, Ares Capital isn’t just another BDC. It is the largest publicly-traded BDC by market capitalization at $11.5 billion, making it comparable in size to more familiar names like Morningstar (NASDAQ:MORN), CarMax (NYSE:KMX), and ZoomInfo (NASDAQ:ZI). The company holds ~$21.9 billion in total investments spread across a portfolio of 490 companies and has managed to return an average of 13% annually to shareholders since its IPO when factoring in reinvested dividends.
The Allure for Income Investors
With the exception of two outliers — one in the midst of the Great Recession and the other during the pandemic-induced market dip, Ares Capital has traded within a fairly well-defined range. Since debuting in 2004 at $15.30/share, the stock has traded between $12.75 and its all-time high of $21.92.
Even when considering the two aforementioned outliers, the stock managed to recover in a short time. From its all-time low in March 2009 during the Great Recession, ARCC gained 378% by April 2010. Following its five-year low in April 2020, shares went on to gain 85% by the end of that year.
Meanwhile, Ares Capital continues its history of strong dividend payments. From September 2013 to December 2023, the company has paid quarterly distributions ranging from a low of $0.38/share to a high of $0.51/share, with 2023 seeing $1.92/share as ARCC’s annual dividend.
The company’s commitment to paying a healthy dividend has factored into analysts’ bullishness on the stock. Insider trading also supports this thesis. Between January 2, 2024, and January 4, 2024, Warren Buffett’s Berkshire Hathaway purchased over 5.5 million shares of ARCC valued at more than $164 million between Berkshire’s Class A (NYSE:BRK.A) and Class B (NYSE:BRK.B) holdings. This increased Berkshire Hathaway’s total number of ARCC shares to 44.88 million.
Promising Technical Indicators
Beyond its sound fundamentals, ARCC shows strength in a handful of technical indicators. Over the past month, technical sentiment has been overwhelmingly bullish, with the five-day, 10-day, 20-day, 50-day, and 100-day simple and exponential moving averages all evidencing forthcoming gains. Shares are trading above both the 50-day and 200-day simple moving averages, the thresholds for both short-term and long-term bullishness.
Ares Capital is also evidencing a potential near-term opportunity when considering its Relative Strength Indicator (RSI) reading. After reaching 70 in the first week of this year — where shares are considered overbought — the current RSI reading of around 40 is quickly approaching oversold territory, which could be indicative of a short-term price reversal.
Is ARCC Stock a Buy, According to Analysts?
Currently, the average ARCC stock price target of $20.94 implies 3.8% upside potential. Despite that forecast being only slightly higher than the share price, because of its strong 9.4% yield, the stock earns a Strong Buy consensus based on six Buys, two Holds, and zero Sells assigned in the past three months.
The Takeaway
Shares of ARCC are primed to rise modestly over the next year, but as the largest publicly traded BDC, the stock doesn’t carry the same downside risk potential that other BDCs do. Plus, its generous high yield continues to reward shareholders. Based on its sound fundamentals and positive technical indicator readings, Ares Capital could be a rewarding addition to your portfolio in 2024.
