BMO Names Ares Capital As Top Choice Among BDC Peers, Upgrades To Outperform

Ares Capital Corporation ARCC offers an attractive dividend yield and has a best-in-class business model, with no execution risk related to asset clean-ups or transitions out of legacy businesses, according to BMO Capital Markets.

The Analyst

BMO’s Lana Chan upgraded Ares Capital from Market Perform to Outperform while raising the price target from $10 to $20.

The Thesis

Against the backdrop of declining interest rates and benign credit quality, Ares Capital offers a dividend yield of 8.6% and represents “an attractive opportunity for yield-seeking investors,” Chan wrote in the note.

While naming Ares Capital as a top choice among business development companies (BDCs), Chan mentioned that the company had ample flexibility to cover the dividend for the medium term, despite declining rates.

Although Ares Capital, like all BDCs, is asset sensitive, it has several levers to cover its dividend. To begin with, 78% are variable loans and almost all the backlog have floors of around 1%, which would provide a cushion in case of a severe or extended low-interest rate environment, the analyst said.

He added that the asset coverage ratio requirement had been officially lowered in June, giving the company significant flexibility to increase leverage and grow its portfolio. Moreover, Ares Capital has around $325 million in excess taxable income, which can be used to fully cover its dividend, if required.

Price Action

Shares of Ares Capital were up 1.77% to $18.97 at time of publishing Monday.

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