Head to Head Analysis: Ares Capital (NASDAQ:ARCC) and Bain Capital Specialty Finance (NYSE:BCSF)

Ares Capital (NASDAQ:ARCC) and Bain Capital Specialty Finance (NYSE:BCSF) are both finance companies, but which is the superior investment? We will contrast the two businesses based on the strength of their earnings, institutional ownership, profitability, valuation, risk, dividends and analyst recommendations.

Institutional and Insider Ownership

27.4% of Ares Capital shares are held by institutional investors. 0.5% of Ares Capital shares are held by company insiders. Comparatively, 0.6% of Bain Capital Specialty Finance shares are held by company insiders. Strong institutional ownership is an indication that large money managers, endowments and hedge funds believe a company will outperform the market over the long term.

Profitability

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

	Net Margins	Return on Equity	Return on Assets
Ares Capital	45.16%	10.08%	4.80%
Bain Capital Specialty Finance	33.45%	11.03%	4.66%

Dividends

Ares Capital pays an annual dividend of $1.92 per share and has a dividend yield of 9.6%. Bain Capital Specialty Finance pays an annual dividend of $1.68 per share and has a dividend yield of 12.1%. Ares Capital pays out 96.0% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Bain Capital Specialty Finance pays out 116.7% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Bain Capital Specialty Finance has raised its dividend for 4 consecutive years. Bain Capital Specialty Finance is clearly the better dividend stock, given its higher yield and longer track record of dividend growth.

Valuation and Earnings

This table compares Ares Capital and Bain Capital Specialty Finance”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	$2.99 billion	4.77	$1.52 billion	$2.00	9.97
Bain Capital Specialty Finance	$292.65 million	3.08	$119.42 million	$1.44	9.65

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

Analyst Recommendations

This is a summary of current recommendations for Ares Capital and Bain Capital Specialty Finance, as provided by MarketBeat.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
Ares Capital	0	3	7	0	2.70
Bain Capital Specialty Finance	0	1	2	0	2.67

Ares Capital presently has a consensus price target of $22.25, indicating a potential upside of 11.58%. Bain Capital Specialty Finance has a consensus price target of $15.50, indicating a potential upside of 11.55%. Given Ares Capital’s stronger consensus rating and higher probable upside, equities research analysts clearly believe Ares Capital is more favorable than Bain Capital Specialty Finance.

Volatility and Risk

Ares Capital has a beta of 0.59, suggesting that its share price is 41% less volatile than the S&P 500. Comparatively, Bain Capital Specialty Finance has a beta of 0.61, suggesting that its share price is 39% less volatile than the S&P 500.

Summary

Ares Capital beats Bain Capital Specialty Finance on 12 of the 17 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 Bain Capital Specialty Finance

Bain Capital Specialty Finance, Inc. is business development company specializing in direct loans to middle-market companies. The fund seeks to invest in senior investments with a first or second lien on collateral, senior first lien, stretch senior, senior second lien, unitranche, mezzanine debt, junior securities, other junior investments, and secondary purchases of assets or portfolios that primarily consist of middle-market corporate debt. It typically invests in companies with EBITDA between $10 million and $150 million.