Ares Capital (NASDAQ:ARCC), a business development company (BDC) that pays out most of its profits as dividends, went public in October 2004 at $15 a share. Its stock has only risen about 45% since then, but it's delivered a total return of 1,090% after including its reinvested dividends. Therefore, a $10,000 investment in its IPO would be worth about $119,000 today, paying out approximately $10,450 in annual dividends.
That's an impressive return that beat the S&P 500's total return of 627% during the same period, but it probably didn't mint too many millionaires on its own. So could Ares Capital churn out millionaire-making gains from a fresh $10,000 investment over the next two decades, or will it remain a steady dividend stock for conservative investors?
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How does Ares Capital make money?
As a BDC, Ares provides direct loans to "middle market" companies that generate $10 million to $250 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) each year. These companies often struggle to secure loans from traditional banks, which consider them higher-risk clients, but they're also too small to attract bigger investments from private investors and venture capital firms. Ares usually invests anywhere from $30 million to $500 million in debt and equity in each company.
Ares takes on more risk than traditional banks, but it also charges higher interest rates. Its floating-rate loans are pinned to the Federal Reserve's benchmark rate, so elevated interest rates generally boost its net income. However, sudden interest rate spikes can also curb its growth by making its loans less attractive.
Over the past two decades, Ares scaled up its business by acquiring other firms like Allied Capital, Area Property Partners, Energy Investors Funds, American Capital, SSG Capital Holdings, Landmark Partners, Black Creek Group, and AMP Infrastructure Debt. Those acquisitions expanded and diversified its portfolio, which is now spread out across 550 companies. It allocates 63.8% of that portfolio to first- and second-lien secured loans, which puts it ahead of other creditors if its clients go bankrupt.
Ares' portfolio had a fair value of $26.8 billion at the end of 2024, making it the world's largest BDC. Its closest peer, Blue Owl Capital, had a portfolio of 227 companies with a fair value of $13.2 billion at the end of 2024.
How fast has Ares Capital been growing?
We can generally gauge the health of a BDC through its net assets per share and debt-to-equity ratio. From 2004 to 2024, its year-end net assets per share grew from $14.43 to $19.89 as it expanded its portfolio. Ares Capital's debt-to-equity ratio rose from 0.38 to 0.99 as it issued more loans, but its total liabilities haven't eclipsed its shareholder equity yet. Ares' stock historically trades at a slight $1-$2 premium to its net assets per share.
As a BDC, Ares must pay out at least 90% of its pre-tax profits as dividends to maintain a favorable tax rate. It doesn't raise its dividend every year, but it's already boosted its annual payout from $1.30 per share in 2005 to $1.92 per share this year. That equals a hefty forward dividend yield of about 8.8% at its current price.
Analysts expect Ares' core EPS to dip 7% to $2.16 per share in 2025 as interest rates gradually decline, but it should still comfortably cover its dividends. At $22, Ares also looks like a bargain at roughly 10 times this year's core EPS.
But is Ares Capital a millionaire-maker stock?
Assuming Ares maintains its conservative approach and continues growing at a similar rate over the next 20 years, it could replicate its 1,090% total return since its IPO. But on its own, it probably won't churn a $10,000 investment into $1 million. That said, it's still a reliable stock that could keep beating the market with its massive total returns.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
