Ares Capital Corporation ARCC stock has not been able to remain immune to the recent broader market decline. In the past month, it has lost 6%. The stock has underperformed the industry and the Zacks Finance industry. Nonetheless, the stock has fared better than its peers, such as Amalgamated Financial Corp. AMAL and Hercules Capital, Inc. HTGC.

ARCC’s One-Month Price Performance

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The recent market slump was primarily driven by the ongoing tariff war, as President Trump’s tariffs have led to retaliation, igniting concerns regarding a full-scale trade war. Also, economic data indicates a slowdown in the U.S. Inflationary pressure has also remained elevated. These factors resulted in ambiguity and fear in the market, exacerbating the downturn.

Given the uncertain and volatile backdrop, let us decipher whether ARCC stock is worth adding to your portfolio.

Factors to Support Ares Capital’s Stock

Rising Investment Commitments to Aid Investment Income: Ares Capital has been witnessing growth in its total investment income over the years. While the metric declined in 2020, it witnessed a five-year (2019-2024) compound annual growth rate (CAGR) of 14.4%. The rise has been primarily driven by an increase in demand for personalized financing solutions, leading to higher investment commitments.

Revenue Trend

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In 2024, 2023, 2022, 2021, 2020 and 2019, the company originated $15.1 billion, $6 billion, $9.9 billion, $15.6 billion, $6.7 billion and $7.3 billion, respectively, in gross investment commitments to new and existing portfolio companies. Moreover, from Jan. 1, 2025, to Jan. 28, 2025, the company made new investment commitments worth roughly $1.2 billion, of which roughly $864 million was funded.
 
As of Dec. 31, 2024, ARCC had a diversified investment portfolio of $26.7 billion across 550 portfolio companies, thus reducing concentration risk and adding sustainability to the total investment income. It had 24.5% of its investment portfolio in software & services and 12% in healthcare equipment & services. Other major investment areas were commercial & professional services (9.4%), financial services (9.9%) and insurance services (5.9%).

Investment Portfolio

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ARCC’s total investment income is likely to grow on the back of relatively lower interest rates, driving higher demand for customized financing, a diverse investment portfolio and a steady rise in investment commitments.

Sales Estimates

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Impressive Capital Distributions: As of Dec. 31, 2024, Ares Capital had a debt of $13.7 billion, while cash and cash equivalents (including restricted cash) were $860 million. Additionally, the company has a revolving credit facility, enabling the company to borrow up to $4.5 million whenever required.

Given a decent balance sheet position, the company has been engaging in capital distribution activities. ARCC distributed 90% of its taxable income as dividends to maintain its regulated investment company (RIC) status.
 
The company last hiked its dividends in 2022 by 11.6% to 48 cents per share. The company has increased its dividend four times in the last five years with an annualized dividend growth of 5.45%. Its dividend payout ratio is 82%.

Dividend Yield

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Similarly, AMAL has increased its dividends thrice in the last five years, while HTGC has increased it nine times during the same period.

ARCC also has an ongoing repurchase plan. This February, it announced an extension of its existing share repurchase authorization of $1 billion, set to expire on Feb. 15, 2026.

Bearish Analyst Sentiments for ARCC Stock

Over the past week, the Zacks Consensus Estimate for 2025 and 2026 earnings of $2.18 and $2.16, respectively, has been revised marginally downward.

Estimate Revision Trend

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The projected figures imply a decline of 6.4% and 1.1% for 2025 and 2026, respectively.

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

To Buy or Not to Buy Ares Capital Stock Now

Ares Capital is well-positioned for growth, given the demand for customized financing, relatively lower rates, and a diversified investment portfolio. Also, a decent liquidity position is a tailwind.

However, a steady rise in expenses is a headwind. Although expenses dipped in 2020 and 2022, the company recorded a five-year CAGR of 16.6% (ended 2024) due to higher interest and credit facility fees and income-based fees. Overall expenses are expected to be elevated in the near term due to the company’s expansion efforts.

Expense Trend

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In terms of valuation, Ares Capital’s price-to-book ratio (P/B) of 1.09X is higher than the industry's 0.96X. Thus, the stock is trading at a premium. This suggests that investors may pay a higher price than the company's expected earnings growth.

P/B Ratio

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Further, bearish analyst sentiments are a headwind.

Thus, investors should watch out for these concerns and monitor how Ares Capital navigates the current operating backdrop and generates solid investment income. Those who already own the stock can hold on to it for robust long-term gains.

Currently, ARCC carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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