Should You Buy Ares Capital Corporation Stock While It's Below $21?

Core Viewpoint - Ares Capital Corporation presents an attractive investment opportunity with a 9.3% dividend yield, but investors should be aware of potential risks associated with lending to mid-sized companies [1][4][10]. Company Overview - Ares Capital Corporation operates as the largest business development company (BDC) in the United States, primarily lending to middle-market businesses at high interest rates [4]. - The company is required to distribute 90% of its taxable income to investors, making its dividend yield appealing for passive income seekers [4]. Financial Performance - The current stock price of Ares Capital is $20.62, which is 14% below its 52-week high [2][3]. - The market capitalization stands at $15 billion, with a gross margin of 76.26% [3][4]. - As of September 30, only 3.6% of its investments are performing below expectations, a slight increase from 2.9% at the end of December [9]. Interest Rate Sensitivity - Ares Capital's earnings are closely tied to interest rates, with many loans having floating rates. A decline in interest rates could negatively impact interest income and net investment income [5]. - The company is more attractive in stable or rising interest rate environments due to the potential for earnings erosion in a rate-cut cycle [5]. Credit Quality and Risks - The credit quality of underlying assets is a key risk for investors, as Ares Capital lends to companies that often lack access to traditional financing, making them riskier borrowers [6]. - Recent high-profile defaults, such as those of First Brands and Tricolor, have raised concerns about the stability of certain credit markets [7][8]. - Ares Capital has no exposure to these troubled companies and employs thorough due diligence to mitigate risks associated with receivables financing [8]. Management and Strategy - The management team has extensive experience in lending to middle-market companies, with a diversified portfolio of over 587 companies across various sectors [9]. - Approximately 61% of Ares Capital's loans are first lien, providing priority in repayment if borrowers face difficulties [9]. - The CEO has indicated that the company is positioned to maintain its current dividend payout for the foreseeable future, as core earnings exceed the dividend payment [11].