Donald Trump’s sweeping order that US defense companies invest more in new factories or be forced to limit shareholder returns is fraught with risks, industry experts have warned.
The U.S. president’s executive order issued Wednesday outlined restrictions on dividend payments, stock buybacks and executive compensation, but provided little guidance or detail on how performance could be judged or how sanctions could be imposed.
That order was quickly followed by Trump’s call for Congress to increase military spending by 50 percent to $1.5 trillion by 2027.
The threat of a drastic reduction in shareholder and executive pay, combined with a potential spending boom, has left the defense sector in limbo and investors on edge.
“If the view of shareholders is that the carrot is still there somewhere in the future but the industry will continue to be hit with a stick, then there is a danger that this will drive capital away from these companies instead of investing it,” said Byron Callan, an analyst at Capital Alpha Partners.
Trump has launched frequent attacks on the industry over delayed and over-budget programs.
The president has repeatedly called for a better-funded military in recent actions, including in Venezuela, emphasizing the administration’s reliance on established contractors and their weapons. He has made overhauling the Pentagon’s procurement practices a key priority, with a focus on eliminating cost overruns and delays.
Contractors have also been criticized for not investing enough of their own capital in expanding production, amid rising demand, including for missiles, following Russia’s invasion of Ukraine four years ago.
Trump called defense executive salaries “exorbitant and unjustifiable” in a social media post Wednesday before issuing the executive order requiring companies to build new factories to deliver and maintain this “important equipment.” In his post, Trump capped potential salaries at $5 million a year – a “mere fraction” of current levels – until new, modern production facilities are built.
Shareholder returns for the largest defense companies outpaced investments in 2023 and 2024, according to Jefferies analysts. The companies returned nearly $50 billion to shareholders while reinvesting $39 billion over a two-year period. However, some companies, notably RTX, also have significant trading activities. Boeing did not return any capital as it focused on rebuilding its balance sheet.
Defense stocks, which had fallen immediately after the dividend threat, jumped sharply Thursday following news of a potential Pentagon budget increase. Shares of RTX, whose defense company Raytheon was singled out by Trump on Wednesday in a separate social media post for its failure to invest in new factories, also rose before giving up their gains.
Jerry McGinn, a former Northrop Grumman executive and director of the Industrial Base Center at the CSIS think tank in Washington, noted that despite Trump’s threats, his administration recognized the need for the U.S. government to provide better incentives for defense companies to make long-term investments.
On Tuesday, the Pentagon announced a framework agreement with Lockheed Martin to produce Patriot missiles over a seven-year period — a much longer-term commitment than most government defense contracts for such a program.
“We will award companies larger, longer contracts for proven systems so that these companies will be confident in their ability to invest more to grow the industrial base that supplies our weapons systems more and faster,” Trump Defense Secretary Pete Hegseth said.
Eric Fanning, president of the trade body Aerospace Industries Association, said the industry welcomed the administration’s “focus on accelerating the acquisition process,” adding that providing “stable demand signals and clear requirements” would spur investment.
RTX, L3 Harris, General Dynamics and Boeing all declined to comment. Lockheed Martin and Northrop Grumman did not immediately respond to requests for comment.
Trump’s executive order states that Hegseth has 30 days from Jan. 7 to review contractors’ performance and identify any deficiencies, including “underperformance” of their contracts or failure to invest in production capacity.
If remedial measures fail, Hegseth can use a number of legal and regulatory avenues, such as the Defense Production Act, to initiate “immediate actions aimed at achieving solutions.”
According to the order, Hegseth has 60 days to ensure that any future contract contains a provision prohibiting any stock buybacks and dividends upon “underperformance, noncompliance with the contractor’s contract, insufficient prioritization of the contract, insufficient investment or insufficient production speed as determined by the Secretary.”
The order also requires executive compensation to be tied to nontraditional financial metrics such as on-time delivery and increased production.
However, analysts said it was unclear what legal basis the government had to apply restrictions on the return of capital. The order “leaves aside details or benchmarks, but strongly encourages tying the ability to repurchase shares and pay dividends to contract performance,” Sheila Kahyaoglu, an analyst at Jefferies, said in a note.
Capital Alpha’s Callan warned that limiting executive pay could affect companies’ ability to “recruit and retain senior executives.” Companies “may have to do something symbolic” when they announce their full-year results in the coming weeks, such as suspending share buybacks, he said.
It is unclear which companies are included in the order, which appears to target publicly traded companies in the United States. Several foreign groups, notably the British BAE Systems, however, have significant activities in the United States.
For investors in established contractors, the fear is that Trump’s intervention could change the arguments in favor of these companies, the traditional “value stocks.”
Kristine Liwag, an analyst at Morgan Stanley, noted that “return on capital is a central part of the U.S. defense investment case” and that “limiting return on capital would harm one of the sector’s key differentiators compared to other industrial and commercial end markets.”
But she also said that while “a limit on capital returns is an additional negative, its size is manageable,” adding that a potential annual U.S. defense budget of $1.5 trillion would offset the possible negative ramifications of any restrictions on capital returns.
In the meantime, CSIS’s McGinn said, companies should likely suspend dividends and buybacks in the near term to avoid a political backlash. But in the absence of adequate incentives from the Pentagon, “they’re not going to throw money down the drain because the government tells them to.”.”
Data visualization by Clara Murray in London
