The President Trump has threatened to stop stock buybacks for US major defense contractors and their dividends until they increase weapons production and cut costs.
The Administration is drafting a draft executive order that targets firms such as Lockheed Martin Northrop Grumman RTX Boeing General Dynamics and General Dynamics.
These companies allegedly return billions of dollars to their shareholders each year, yet they are accused of missing Pentagon deadlines and spending more than budgeted on vital weapons programs.
Trump’s objective is crystal clear: Force these contractors to redirect money from shareholders payouts towards factories, equipment and production capability.
The White House’s proposal
Draft executive orders would limit dividends, stock purchases, and executive compensation to defense companies that are overbudget or behind schedule with weapons programs.
Sources told Reuters in December that the White House had been preparing this measure and Trump could sign it as early as January.
Trump made a public declaration on Truth Social Wednesday:
I won’t allow dividends to be paid out or stocks bought back by defense companies until these issues are resolved.
Although the exact mechanisms of enforcement are not known, it is believed that this directive was based on a Treasury Department Initiative.
The details are yet to be finalised. This includes eligibility thresholds and triggers.
This comes after years of frustration by the Pentagon with the defence industry.
Northrop Grumman’s Sentinel program for intercontinental missiles has risen to a staggering $140.9 billion. This is an 81% increase over the original estimate of $77.7billion.
Throughout its development, the F-35 program at Lockheed Martin has experienced cost and schedule delays.
These same companies have also spent billions on rewarding their shareholders.
Lockheed Martin has recently increased its quarterly dividend (the 23rd consecutive annual increase for the company) to $3.45 a share and authorized an additional $2 billion in stock buybacks, bringing their total authority of $9.1 billion.
Northrop Grumman has authorized a $3 billion stock buyback in December 2024. The company pays out a quarterly dividend of $2.31.
Between 2021 and 2024, Lockheed (RTX), General Dynamics (Northrop), and General Dynamics (Lockheed) will spend a combined $89 billion in buybacks, dividends, and other corporate actions.
Estimated $58 billion came from government contracts funded by taxpayers.
Legal and market implications
The news has caused a fall in the defense stocks.
Lockheed Martin and Northrop Grumman both fell by 1.7% in trading on Wednesday after Trump’s remarks.
Analysts are concerned that the restrictions will reduce the earnings-per-share support. Buybacks increase EPS artificially by reducing the number of shares, while dividend yields which attract institutional investors may be hurt.
Legal experts, however, say that Trump’s ability to enforce these restrictions is in question.
Executive orders can’t create new laws, but they can direct federal agencies on how to enforce the existing laws.
It is likely that the administration will tie government contracts to restrictions, and threaten to stop work until firms comply.
This approach may be more feasible politically, but it is less clear-cut legally. The industry groups have begun preparing for litigation.
Defense contractors are also likely to benefit, according to analysts.
Trump has signaled a willingness for the Pentagon to increase its budget, which would allow revenues to grow enough to compensate dividend reductions.
It is a question of whether or not contractors are willing to comply with the rules in order to get larger contracts, or if they will fight them at court.
The post Why Trump wants Defense Companies to Cut Stock Buybacks and Dividends will be updated as new information becomes available
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