Excess cash at Ares increases distributions
Ares Capital Corp. (ARCC:NASDAQ) (ARCC, Nasdaq, 21.67) reported record core earnings for the quarter and year, as well as its strongest origination of new loans in its history, with the annual rate double that of 2020 and 2019. Increasingly, Ares is investing in more larger companies, and despite the increased competition, continues to take market share. With a net debt to equity ratio of just 1.2x and $4.8 billion in cash and available credit, Ares is positioned to continue to take advantage of opportunities. Despite the increase in the average size of its investments, it is well diversified, with its largest 10 investments accounting for less than 11% of the portfolio.
Dividend up as holdings perform well
Its portfolio companies are performing well, with a decline in loans on non-accrual, leading to a 12% increase in NAV. As a result of the strong performance and the high undistributed income (an increase over the 2020 level. Now equaling to $1.30 per share), Ares increased its quarterly dividend, for the second time in the past year, and said it intends to pay a bonus dividend each quarter this year.
One might expect a reduction in new investment activity this year, since there was a burst of activity last year as people came out of lockdown and resumed more normal business activity. But we would still expect a reasonably active year, and a maintenance in the credit profile of its companies.
Ares stock has been very strong over the past year, trading at 1.15x NAV, a premium which used to be unusual for BDCs. The forward yield is over 8%. If you do not own, or are wanting to increase your exposure to quality income investments, it can be bought here.
Gladstone raises distributions on higher income and rollover income
Gladstone Investment Corp. (GAIN: NASDAQ) (GAIN, Nasdaq, 15.61) reported a solid quarter, but warned of increased competition and valuations leading to fewer new investments. In the past quarter, all new investments were add-ons to existing companies. New investment income was up, and Gladstone has undistributed income of over $17 million. In light of this, a supplement distribution of 9 cents was paid in December with another 12 cents to be paid this month.
Gladstone invests in both debt and equity, with equity currently around 23% of assets (at cost). The monthly dividend has come from income off debt and other fees, while net capital gains feed the extra distributions. The company said it may decide to increase the monthly dividend, partly using the rollover income. But Gladstone has traditionally been very reluctant to increase its regular dividend if it did not consider the payment was secure, so an increase in the regular dividend would be a strong sign.
Attractive deals increasingly tough to come by
The biggest problem going forward will be finding new investments at attractive valuations, since companies have “very high valuations expectations” amid “very strong” competition. Gladstone used to have the lower middle-market almost to itself! Chairman David Gladstone is not the kind of man to chase deals! Other than that, the company is doing well, with asset coverage of 259%, low leverage, and a stable credit profile (with three companies continuing on non-accrual).
Gladstone is also trading at a premium to NAV (1.19x). Trailing yield is 7.4% and the forward return should be higher given the higher bonus distributions. But these extra distributions are difficult to predict since they depend on capital gains, by their nature lumpy. We are holding, but looking for opportunities to add to positions.
TOP BUYS: The gold and silver stocks are mostly up today. Of those mentioned in yesterday's Bulletin, best buys would be Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX) (VGZ.NY, 0.81), Lara Exploration Ltd. (LRA:TSX.V) (LRA, To., 0.495), and Midland Exploration Inc. (MD:TSX.V) (MD, To., 0.495).
Originally published on Feb. 14, 2022.
Adrian Day, London-born and a graduate of the London School of Economics, is editor of Adrian Day’s Global Analyst. His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."
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