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

Insider & Institutional Ownership

24.1% of Stellus Capital Investment Corporation shares are owned by institutional investors. Comparatively, 49.5% of Ares Capital Corporation shares are owned by institutional investors. 4.2% of Stellus Capital Investment Corporation shares are owned by insiders. Comparatively, 0.5% of Ares Capital Corporation shares are owned by insiders. Strong institutional ownership is an indication that hedge funds, endowments and large money managers believe a stock will outperform the market over the long term.

Profitability

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

Net Margins Return on Equity Return on Assets
Stellus Capital Investment Corporation 68.17% 10.06% 5.01%
Ares Capital Corporation 44.61% 8.95% 5.13%

Earnings and Valuation

This table compares Stellus Capital Investment Corporation and Ares Capital Corporation’s gross revenue, earnings per share and valuation.

Gross Revenue Price/Sales Ratio EBITDA Earnings Per Share Price/Earnings Ratio
Stellus Capital Investment Corporation N/A N/A N/A $2.12 6.41
Ares Capital Corporation N/A N/A N/A $1.29 12.29

Stellus Capital Investment Corporation is trading at a lower price-to-earnings ratio than Ares Capital Corporation, indicating that it is currently the more affordable of the two stocks.

Analyst Recommendations

This is a summary of recent recommendations and price targets for Stellus Capital Investment Corporation and Ares Capital Corporation, as reported by MarketBeat.com.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
Stellus Capital Investment Corporation 0 1 2 0 2.67
Ares Capital Corporation 0 2 7 0 2.78

Stellus Capital Investment Corporation currently has a consensus target price of $15.00, suggesting a potential upside of 10.38%. Ares Capital Corporation has a consensus target price of $17.93, suggesting a potential upside of 13.11%. Given Ares Capital Corporation’s stronger consensus rating and higher possible upside, analysts plainly believe Ares Capital Corporation is more favorable than Stellus Capital Investment Corporation.

Dividends

Stellus Capital Investment Corporation pays an annual dividend of $1.36 per share and has a dividend yield of 10.0%. Ares Capital Corporation pays an annual dividend of $1.52 per share and has a dividend yield of 9.6%. Stellus Capital Investment Corporation pays out 64.2% of its earnings in the form of a dividend. Ares Capital Corporation pays out 117.8% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Stellus Capital Investment Corporation is clearly the better dividend stock, given its higher yield and lower payout ratio.

Risk & Volatility

Stellus Capital Investment Corporation has a beta of 0.56, suggesting that its share price is 44% less volatile than the S&P 500. Comparatively, Ares Capital Corporation has a beta of 0.62, suggesting that its share price is 38% less volatile than the S&P 500.

About Stellus Capital Investment Corporation

Stellus Capital Investment Corporation is a closed-end, non-diversified management investment company. The Company originates and invests primarily in private middle-market companies through first lien, second lien, unitranche and mezzanine debt financing, with corresponding equity co-investments. The Company’s investment objective is to maximize the total return to its stockholders in the form of current income and capital appreciation. It invests in various sectors, such as business services, energy, general industrial, government services, healthcare, software and specialty finance. Its investment advisor is Stellus Capital Management, LLC (Stellus Capital Management). Stellus Capital Management is responsible for analyzing investment opportunities, conducting research and performing due diligence on investments, negotiating and structuring the Company’s investments, originating prospective investments, and monitoring its investments and portfolio companies on an ongoing basis.

About Ares Capital Corporation

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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