One afternoon in January, President Trump sent the stocks of the military-industrial complex stumbling when he complained that defense contractors were paying dividends too generously, buying back their own stock too aggressively, and compensating executives too lavishly.
While the president loves a booming market, Trump has grown frustrated with prime defense contractors – heavy-weight companies with direct Pentagon contracts and Fortune 500 valuations – rewarding shareholders rather than reinvesting profits into their manufacturing capacity even as they fall behind in the delivery of weapons and systems.
“This situation,” Trump wrote in a TruthSocial post, “will no longer be allowed or tolerated!” He then issued an executive order that threatens to limit dividends, stock buybacks, and CEO pay.
One month later, the stock price of all five of the prime defense contractors – Boeing, General Dynamics, Lockheed Martin, Northrop Grumman, and RTX – have all rebounded. None, however, have made new commitments on paying dividends, and just one company, Northrop Grumman, manufacturer of the new B-21 Stealth Bomber, has publicly announced that they plan to pause stock buybacks.
But that does not mean Trump isn’t getting his way. The saber-rattling seems to be working. Defense contractors are expected to increase reinvestment, spending capital on their own manufacturing capacity, by more than a third this year.
The administration has adopted a familiar posture: Trust but verify.
All of it is a delicate subject in the earnings calls of weapons manufacturers who service the preeminent world superpower.
Jim Taiclet was asked twice during a recent call about the Trump executive order. And twice the CEO of Lockheed Martin was non-committal. He told shareholders that the company will make announcements about capital deployment and will continue to “operate in a dynamic way.” The White House raised an eyebrow.
“If defense contractors refuse to honor their commitments to our military,” White House spokeswoman Anna Kelly told RealClearPolitics, “there will be consequences.”
“President Trump has been clear that all defense contractors should be prioritizing the on-time delivery of weapons to our warfighters over their own stock buybacks, excessive corporate dividends, and inflated executive salaries,” Kelly added.
The dividend has been commonplace among defense contractors for decades. The industry is predicated on stable profits, not explosive growth, especially during times of peace. A share of those profits are returned to shareholders, according to the model, as a way of rewarding and retaining investors long-term. The complaint is that those payments have become too generous and come at the expense of investment and innovation.
Stock buybacks are also a regular business practice. Firms generally buy back more of their own shares to consolidate control when they deem the stock undervalued. Buybacks reflect the belief that future performance will exceed current returns, thus limiting supply and increasing the price. The gripe is that the move pads corporate bottom lines, in this case, at the expense of the customer – the taxpayer.
A spokesperson for Lockheed Martin said the company shares all the priorities of the administration, “speed, accountability, and results,” telling RCP that they “will continue to invest and innovate at scale to ensure our warfighters maintain a decisive advantage and are never sent into a fair fight.”
The recent U.S. raid that led to the capture of Venezuelan dictator Nicolás Maduro may be the best advertising for that boast: The F-35 Joint Strike Fighter helped achieve air dominance, easily outclassing imported Russian air-defense systems. The awesome power of the prime defense contractors is not in doubt by lawmakers. They just want the manufacturers to invest more of their own capital into ensuring that the merchandise, everything from artillery shells to advanced missile systems, is delivered on time.
“It introduces more short-term risk for shareholders while it limits risk for the government customer who wants to buy next-generation, advanced capabilities,” said Mikhail Grinberg, partner at Renaissance Strategic Advisors, a consulting firm to the defense and aerospace industry. “That is the balancing act that’s required.”
Trump is not the first president to wade into a fight with the military-industrial complex. But his tussles with law firms, news organizations, and even foreign heads of state have may have convinced CEOs that a public spat with the commander in chief is counterproductive.
“We absolutely feel the responsibility and urgency to deliver more and to deliver it faster,” said Chris Calio, chief executive of RTX, after the company reported an increase in profits of 41%. “And candidly, we understand the frustration.” Formerly known as Raytheon, the company that produces the Patriot Missile Defense System intends to spend more than $3 billion on capital expenditures, $600 million less than they paid investors in dividends last year. “We’ve been paying them for decades on a quarterly basis,” Calio continued, “so we remain committed to the dividend.”
Representatives from RTX did not return RCP requests for comment. Boeing was similarly unresponsive, though that company has not paid dividends or carried out a round of stock buybacks since 2020 due to significant debt obligations. General Dynamics, manufacturer of everything from tanks to attack submarines, declined to comment. All of them have been under pressure by both Democrat and Republican administrations.
“If you’re a company producing aircraft, ships, or submarines on time, well, then God Bless America,” former Navy Secretary Carlos Del Toro told RCP. The founder and CEO of a defense contractor before joining the Biden administration, he leaned on the industry in that role and lambasted certain defense contractors for using buybacks to “goose your stock prices.” His line has remained consistent outside government. “If you’re well behind, and you keep coming back to the well asking for more money from the American taxpayer,” Del Toro said, “then you should be more balanced in how your company is buying back stock or delivering dividends.”
Balance has been lacking at times. Analysis by the defense consulting firm McAleese and Associates found that General Dynamics, RTX, Lockheed Martin, and Northrop Grumman paid a total of $9 billion in dividends and spent $8.4 billion buying back stock in FY24 compared to $13.3 billion in internal research and development and capital expenditures. It’s a long-standing problem. Between 1994 and 2018, prime defense contractors returned $240 billion to shareholders via stock buybacks and dividends but made less than $90 billion in capital expenditures, a recent American Compass analysis found.
Those numbers are eye-popping, but Grinberg cautioned that they do not reflect “executive hubris.” Instead, the defense analyst noted that “shareholders of these companies, most of them, are institutional investors that manage your 401Ks or your neighbor’s pension plan.”
Advocates for the industry insist that arsenals of democracy are not built overnight and require significant public investment, even during times of peace, to ensure military readiness. “Dividends and share buybacks are a symptom of the model we have,” Grinberg said, noting the significant consolidation in the industry that began at the behest of the Pentagon after the Cold War. “We chose, as a nation, over several decades to have a stable defense industrial base that’s relatively concentrated, has stable performance, and allows shareholders predictable returns.”
Permanent reform would likely require congressional action. Meanwhile, Rhode Island Sen. Jack Reed, ranking Democrat on the Senate Armed Services Committee, cautioned that if Trump’s proposed restrictions are to survive legal challenges, legislation would be required. Democrats are generally inclined to look favorably on the new prohibitions though questions remain about their enforcement.
“It’s generally a good push to make the companies more accountable and reinvest profits into their businesses,” a senior Democratic Hill staffer told RCP. “That’d certainly be a good outcome for our defense and for the United States. It just sort of remains to be seen how we actually get there.”
An energetic president with a bully pulpit is a good place to start, said Daniel Kishi, senior policy advisor at conservative think tank American Compass. Trump’s shot across the bow has simultaneously put “a bee in the bonnet” of company executives while “lighting a fire under their ass” to deliver products on budget and on time.
“These companies receive up to 70% of their revenue from the government. They’re not state-owned enterprises, but they have chosen to become state-dominated given their heavy reliance on taxpayer money. The American people are the customers. The government can dictate the terms of their contracts, and then it’s up to the businesses to meet those terms if they want the revenue,” Kishi said.
Defense contractors have armies of lawyers like all other big businesses, meaning that industry could likely fight, or stave off, any attempt to meddle in how they compensate shareholders. But even without legislation from Congress, the administration wields an implicit threat: cancellation.
“Sticks, in this case, can be powerful insofar as they impose discipline on capital, knowing that the threat is real – the president can drop the hammer,” said Kishi. “The Department of War can modify contracts, or these primes could maybe even lose a contract to a competitor that is being more compliant with the directives from the administration.”
And so, at least for now, Trump has gotten much of what he wanted. The defense industry seems inclined to spend more capital on improving and expanding their own capacity, even if they are unwilling to change the way they pay their shareholders.
