Ares Capital Q4 revenue beats on record originations, margins pressured
Portfolio yield compression to 9.3% highlights challenges as business development company maintains dividend
Ares Capital Corporation reported mixed fourth-quarter results that highlighted the business development company's ability to generate loan growth while navigating a challenging interest rate environment, with shares falling 2% on Wednesday to trade below both its 50-day and 200-day moving averages.
The company posted quarterly revenue of $793 million, surpassing analysts' estimates of $767 million and representing a 3.4% beat, according to earnings data. However, earnings per share of 50 cents missed consensus expectations by roughly 0.7%, falling short of the 50.3 cents analysts had projected.
Despite the earnings miss, Ares Capital achieved a notable operational milestone with $5.8 billion in new loan originations during the quarter—a record level that underscores continued demand for customized private credit financing. However, the company's portfolio yield compressed to 9.3% from 9.9% year-over-year, reflecting broader pressures across the business development company sector as the Federal Reserve's rate cuts throughout 2025 narrow spreads on floating-rate loans.
The margin pressure has been a persistent concern for investors, particularly as the company faces higher borrowing costs. Analysis from Zacks Investment Research noted that refinancing activity at elevated rates—with Ares Capital borrowing at 5.25% compared to 3.875% previously—is putting additional pressure on net investment income. This spread compression between what the company earns on its loans and what it pays to borrow has emerged as a key challenge for BDCs in the current rate environment.
The company maintained its quarterly dividend at 48 cents per share, providing an annualized yield of 9.7% at current prices. Management also extended its share repurchase authorization through February 2027, signaling confidence in the stock's valuation relative to its fundamental worth. However, concerns about dividend coverage have persisted among analysts as net investment income faces headwinds from the yield compression trend.
Ares Capital's stock performance has reflected these challenges, with shares declining approximately 15% over the past year and extending an eight-session losing streak ahead of the earnings release. The stock is currently trading at $19.13, well below its 52-week high of $22.38 and beneath its 50-day moving average of $20.43 and 200-day moving average of $21.19.
Despite the near-term headwinds, analysts maintain a generally positive outlook on the company. The average rating among analysts is "Buy," with price targets ranging from $22.25 to $22.33 and a consensus target of $22.69, according to market data. This suggests potential upside of approximately 18% from current levels if the company can successfully navigate the rate environment and maintain its dividend.
The BDC sector has faced broader pressure, with Fitch Ratings recently highlighting a "deteriorating" outlook for business development companies. However, Ares Capital's diversified portfolio and relatively strong credit quality—with non-accrual loans at 2.0%—position it comparatively well within the sector.
Looking ahead, investors will be focused on whether the company can stabilize its portfolio yield and improve net investment income margins. The record originations demonstrate strong demand for Ares Capital's financing solutions, but the spread compression issue will likely remain a central theme for the stock until interest rate dynamics become more favorable.