Contrasting Ares Capital (ARCC) and TCP Capital (NASDAQ:TCPC)

TCP Capital (NASDAQ: TCPC) and Ares Capital (NASDAQ:ARCC) are both finance companies, but which is the superior stock? We will compare the two businesses based on the strength of their analyst recommendations, institutional ownership, risk, valuation, profitability, dividends and earnings.

Earnings & Valuation

This table compares TCP Capital and Ares Capital’s revenue, earnings per share and valuation.

Gross Revenue Price/Sales Ratio Net Income Earnings Per Share Price/Earnings Ratio
TCP Capital $175.97 million 4.77 $90.61 million $1.99 7.17
Ares Capital $1.16 billion 5.89 $667.00 million $1.39 11.53

Ares Capital has higher revenue and earnings than TCP Capital. TCP Capital is trading at a lower price-to-earnings ratio than Ares Capital, indicating that it is currently the more affordable of the two stocks.

Dividends

TCP Capital pays an annual dividend of $1.44 per share and has a dividend yield of 10.1%. Ares Capital pays an annual dividend of $1.52 per share and has a dividend yield of 9.5%. TCP Capital pays out 72.4% of its earnings in the form of a dividend. Ares Capital pays out 109.4% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. TCP Capital is clearly the better dividend stock, given its higher yield and lower payout ratio.

Profitability

This table compares TCP Capital and Ares Capital’s net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
TCP Capital 42.13% 12.63% 6.96%
Ares Capital 57.50% 8.43% 4.88%

Risk and Volatility

TCP Capital has a beta of 0.67, meaning that its share price is 33% less volatile than the S&P 500. Comparatively, Ares Capital has a beta of 0.58, meaning that its share price is 42% less volatile than the S&P 500.

Analyst Recommendations

This is a summary of recent recommendations and price targets for TCP Capital and Ares Capital, as provided by MarketBeat.com.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
TCP Capital 0 0 7 0 3.00
Ares Capital 0 2 8 0 2.80

TCP Capital presently has a consensus price target of $17.67, indicating a potential upside of 23.89%. Ares Capital has a consensus price target of $18.00, indicating a potential upside of 12.36%. Given TCP Capital’s stronger consensus rating and higher possible upside, research analysts clearly believe TCP Capital is more favorable than Ares Capital.

Institutional & Insider Ownership

52.9% of TCP Capital shares are held by institutional investors. Comparatively, 42.7% of Ares Capital shares are held by institutional investors. 0.6% of TCP Capital shares are held by insiders. Comparatively, 0.5% of Ares Capital shares are held by insiders. Strong institutional ownership is an indication that large money managers, endowments and hedge funds believe a stock will outperform the market over the long term.

Summary

TCP Capital beats Ares Capital on 10 of the 16 factors compared between the two stocks.

About TCP Capital

TCP Capital Corp. is an externally managed, closed-end, non-diversified management investment company. The Company’s investment objective is to achieve high total returns through current income and capital appreciation, with an emphasis on principal protection. It invests in the debt of middle-market companies, as well as small businesses, including senior secured loans, junior loans, mezzanine debt and bonds. Its investments may include an equity component and may make equity investments directly. It intends to focus on privately negotiated investments in debt of middle-market companies. It may make investments of all kinds and at all levels of the capital structure, including in equity interests, such as preferred or common stock and warrants or options received in connection with its debt investments. As of December 31, 2016, its investment portfolio consisted of 90 portfolio companies. Tennenbaum Capital Partners, LLC is the investment manager and advisor of the Company.

About Ares Capital

Ares Capital Corporation is a specialty finance company. The Company operates as a closed-end, non-diversified management investment company. The Company’s investment objective is to generate both current income and capital appreciation through debt and equity investments. It invests primarily in the United States middle-market companies. It may from time to time invest in larger or smaller (in particular, for investments in early-stage and/or venture capital-backed) companies. It invests primarily in first lien senior secured loans (including unitranche loans, which are loans that combine both senior and mezzanine debt, generally in a first lien position), second lien senior secured loans, and mezzanine debt, which in some cases includes an equity component. It invests in various industries, such as automotive services, business services, consumer products, and containers and packaging. Ares Capital Management LLC serves as its investment advisor.

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