Contrasting Ares Capital (NASDAQ:ARCC) and TPG (NASDAQ:TPG)

Ares Capital (NASDAQ:ARCC) and TPG (NASDAQ:TPG) are both large-cap finance companies, but which is the better investment? We will compare the two companies based on the strength of their earnings, valuation, institutional ownership, risk, profitability, analyst recommendations and dividends.

Profitability

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

	Net Margins	Return on Equity	Return on Assets
Ares Capital	30.91%	9.80%	4.50%
TPG	4.67%	28.10%	8.03%

Earnings and Valuation

This table compares Ares Capital and TPG”s top-line revenue, earnings per share (EPS) and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
Ares Capital	$3.05 billion	4.45	$1.30 billion	$1.35	14.01
TPG	$3.41 billion	4.88	$184.59 million	$0.66	65.71

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

Dividends

Ares Capital pays an annual dividend of $1.92 per share and has a dividend yield of 10.1%. TPG pays an annual dividend of $2.36 per share and has a dividend yield of 5.4%. Ares Capital pays out 142.2% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. TPG pays out 357.6% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Ares Capital is clearly the better dividend stock, given its higher yield and lower payout ratio.

Risk & Volatility

Ares Capital has a beta of 0.61, meaning that its share price is 39% less volatile than the S&P 500. Comparatively, TPG has a beta of 1.49, meaning that its share price is 49% more volatile than the S&P 500.

Insider & Institutional Ownership

27.4% of Ares Capital shares are owned by institutional investors. Comparatively, 94.0% of TPG shares are owned by institutional investors. 0.5% of Ares Capital shares are owned by insiders. Comparatively, 61.4% of TPG shares are owned by insiders. Strong institutional ownership is an indication that endowments, large money managers and hedge funds believe a stock is poised for long-term growth.

Analyst Recommendations

This is a summary of current ratings and target prices for Ares Capital and TPG, as provided by MarketBeat.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
Ares Capital	0	3	8	0	2.73
TPG	0	4	12	0	2.75

Ares Capital presently has a consensus target price of $20.39, suggesting a potential upside of 7.76%. TPG has a consensus target price of $61.07, suggesting a potential upside of 40.81%. Given TPG’s stronger consensus rating and higher possible upside, analysts clearly believe TPG is more favorable than Ares Capital.

Summary

TPG beats Ares Capital on 11 of the 16 factors compared between the two stocks.

About Ares Capital

Ares Capital Corporation is a business development company specializing in acquisition, recapitalization, mezzanine debt, restructurings, rescue financing, and leveraged buyout transactions of middle market companies. It also makes growth capital and general refinancing. It prefers to make investments in companies engaged in the basic and growth manufacturing, business services, consumer products, health care products and services, and information technology service sectors. The fund will also consider investments in industries such as restaurants, retail, oil and gas, and technology sectors. It focuses on investments in Northeast, Mid-Atlantic, Southeast and Southwest regions from its New York office, the Midwest region, from the Chicago office, and the Western region from the Los Angeles office. The fund typically invests between $20 million and $200 million and a maximum of $400 million in companies with an EBITDA between $10 million and $250 million. It makes debt investments between $10 million and $100 million The fund invests through revolvers, first lien loans, warrants, unitranche structures, second lien loans, mezzanine debt, private high yield, junior capital, subordinated debt, and non-control preferred and common equity. The fund also selectively considers third-party-led senior and subordinated debt financings and opportunistically considers the purchase of stressed and discounted debt positions. The fund prefers to be an agent and/or lead the transactions in which it invests. The fund also seeks board representation in its portfolio companies.

About TPG

TPG Inc. operates as an alternative asset manager in the United States and internationally. The company offers investment management services to TPG Funds, limited partners, and other vehicles. It also offers monitoring services to portfolio companies; advisory, debt and equity arrangement, and underwriting and placement services; and capital structuring and other advisory services to portfolio companies. In addition, the company invests in private equity funds, real estate funds, hedge funds, and credit funds. TPG Inc. was founded in 1992 and is based in Fort Worth, Texas. The company operates as a subsidiary of TPG GP A, LLC.