On Wednesday, January 7, U.S. President Donald Trump targeted defense contractors with an executive order, vowing to block these companies from paying dividends or buying back shares until they speed up weapons production.
The rare presidential actions sent defense stocks lower and signaled sweeping changes that will be coming to America’s “military-industrial complex.” Shares of General Dynamics (GD), Raytheon (RTX), Northrop Grumman (NOC), and Lockheed Martin (LMT) each fell between 2% and 6% following Trump’s comments.
Trump Bans Stock Buybacks, CEO Dividends for Underperforming Defense Contractors
The executive order states that defense companies won’t be “permitted in any way, shape, or form” to pay dividends or buy back stock until they can produce a “superior product, on time, and on budget.”
The order directs the Secretary of War, Pete Hegseth, to identify “underperforming” contractors that provide critical weapons, supplies, and equipment, are not investing their own capital into “necessary production capacity”, are not prioritizing U.S. government contracts, or whose production speed is insufficient as determined by the Secretary, while simultaneously engaging in stock buybacks or corporate profit distributions.
The second Trump administration has criticized the defense industry for its high costs and slow production times. The White House has promised to instill dramatic changes to make the manufacturing of military equipment more nimble.
“Every firm across our economy has a right to profit from prudent investment and hard work, but the American defense industrial base also has the responsibility to ensure that America’s warfighters have the best possible equipment and weapons. These two objectives are not mutually exclusive,” the EO says.
Secretary Hegseth has been directed to review contractors’ performances in 30 days and identify those who are falling short on contracts, failing to invest in production capacity, and not “sufficiently prioritizing” the federal government. If identified, the companies will be notified of a review and will be given 15 days to submit a remediation plan to address the performance issues. And if that fails, then the Secretary may initiate immediate actions to secure “remedies” that will expedite production, prioritize U.S. military, and return the contractor to “sufficient performance, investment, prioritization, and production, to the maximum extent permitted by law.”
Trump Caps Defense CEO Pay at $5M Until Performance Targets Met
In a lengthy Truth Social post, Trump took aim at defense contractors’ executive pay packages, calling them “exorbitant and unjustifiable.” He said that these companies are not producing military equipment rapidly enough, and once produced, not maintaining it “properly or quickly.” The President warned that no executive should be allowed to make in excess of $5 million annually until their companies build new production facilities. CEOs of top defense companies typically make more than $20 million a year through a combination of cash payments and stock grants.
The Secretary of War has been given the authority to “initiate immediate actions to secure remedies” for underperforming companies through legal and regulatory channels, such as the Defense Production Act. The order also suggests that the government may “cease ongoing advocacy” for these contractors when it comes to pursuing potential deals with foreign customers. It also introduces provisions for future contracting, stating that Hegseth has 60 days to ensure that contracts with any new or existing defense contractor, including renewals, prohibit any stock buyback and corporate distributions.
U.S. Defense Stocks Fall as Trump Slams Contractors Over Costs, Delays
Trump singled out Raytheon in his statement, claiming that the major defense contractor is the “least responsive” to the needs of the U.S. Department of War, the slowest in increasing its production volume, and the most aggressive at spending big on their shareholders rather than meeting the needs and demands of the military. He warned that the Pentagon will cut its business ties with Raytheon unless it “steps up” with investing in plants and equipment, before adding that “under no circumstances” will the company be allowed to do any more stock buybacks.
Raytheon makes the Patriot missile system that is widely used in Ukraine, as well as the Tomahawk missiles for the militaries of America’s allies around the world, and several components of the F-35 fighter jet. The company’s stock, RTX, slid 2% following Trump’s statements before recovering and climbing 2.5% in after-hours trading. Meanwhile, the shares of defense giants Lockheed Martin (LMT) fell 4.8%, Northrop Grumman (NOC) dipped 5.5%, and General Dynamics (GD) slid 3.6% during afternoon trading on Wall Street.
