Financial services stocks aren't enjoying the kind of year many thought they would so far in 2025. The prospects of lower interest rates and relaxation of regulations by the Trump administration seemed promising.
However, those predicting a positive environment for financial services stocks weren't counting on the president's steep tariffs throwing the stock market for a loop. Nor were some of them anticipating how the fears of resurging inflation would cause the Fed to pump the brakes on further rate cuts.
Uncertainty and volatility now reign. However, Wall Street remains overwhelmingly bullish about one financial services stock that offers an ultrahigh dividend yield -- Ares Capital(NASDAQ: ARCC).
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Analysts like this top business development company
Ares Capital isn't a household name like some top financial stocks. Its market cap is only around $14 billion, small enough to stay below the radar for many investors. However, Ares Capital is a big player in its niche market. It's the largest publicly traded business development company (BDC) and a leader in providing direct lending to middle-market businesses.
I almost wrote that Ares Capital was a big fish in a small pond. That wouldn't have been entirely accurate, though. The market opportunity for direct lending totals $5.4 trillion. And the demand for BDCs is growing as companies prefer the rapid pace of closing deals they offer.
Wall Street likes this top BDC, too. Of the 13 analysts surveyed by LSEG in May, four rated Ares Capital as the equivalent of a "strong buy." Another seven analysts recommended the stock as a "buy." The two outliers viewed Ares as a "hold."
Sure, analysts recognize that the economic outlook might not be all sunshine and roses for Ares Capital. RBC Capital even reduced its price target for the stock this week. Despite this move, RBC's Kenneth Lee kept an "outperform" rating on Ares Capital and predicts its share price could jump by a double-digit percentage over the next 12 months. The average price target for Ares Capital among analysts surveyed by LSEG reflects an upside potential of 10%.
A silver lining for Ares Capital?
The uncertainty caused by tariffs and threats of tariffs creates a dark cloud for many businesses. However, there could be a silver lining in that dark cloud for Ares Capital.
Kort Schnabel, who has been with Ares Capital since 2001, recently took the helm as CEO from longtime leader Kipp DeVeer. During the company's first-quarter earnings call, Schnabel stated that new transaction activity in the liquid loan market fell sharply beginning in late March. But he pointed out that while many banks have adopted a "risk-off position," the direct lending market has remained more stable as businesses consider private financing solutions.
This doesn't mean there won't be any negative effects for BDCs like Ares Capital. Schnabel acknowledged that some companies could hold off on moving forward with mergers and acquisitions. However, he said, "[W]e believe we are well-positioned to take market share among the transactions that do occur." Schnabel also noted that similar volatile periods in the past have "historically produced attractive financing opportunities to support take-private transactions, spin-offs, and other strategic initiatives."
Ares Capital appears to be in great shape to take advantage of any opportunities the economic uncertainty might provide. The company's balance sheet leverage remains at a conservative level. It has ample financial flexibility to make deals.
Ares' portfolio companies are healthy overall, too, with strong EBITDA growth and debt-to-EBITDA multiples below the five-year average. Importantly, the BDC's portfolio companies are also primarily focused on services, which should be less impacted by high tariffs.
An income investor's dream stock
Ares Capital's forward dividend yield tops 9.2%. The BDC has delivered 63 consecutive quarters of stable or increasing quarterly dividends. Ares' base dividend per share growth ranks at the top of its peer group.
Can Ares Capital keep the juicy dividends flowing at current levels? Schnabel thinks so. He said in the Q1 call that management is "confident that we can continue to support a steady dividend level for the foreseeable future."
I agree with the new CEO's optimism and Wall Street's overall bullish take. Ares Capital looks like an income investor's dream stock, in my view.
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