Trump blocks defense company payouts until arms production speeds up

By Mike Stone and Kanishka Singh

WASHINGTON, Jan 7 (Reuters) – U.S. President Donald Trump vowed to block defense contractors like RTX from paying dividends or buying back shares until they speed up weapons production, a rare presidential strike at Wall Street norms that sent defense stocks lower and signaled sweeping changes for America’s military-industrial complex.

Trump and the Pentagon have criticized the defense industry for what they say are high costs and slow production and have promised dramatic changes to make production of war equipment more nimble. 

“After years of misplaced priorities, traditional defense contractors have been incentivized to prioritize investor returns over the Nation’s warfighters,” Trump said in his executive order released by the White House on Wednesday.

Trump expressed similar sentiment earlier on Wednesday afternoon on social media. Defense stocks fell after his posts, reversing recent gains following the use of U.S. military equipment to capture Venezuelan President Nicolás Maduro and his wife who were seized in Venezuela over the weekend and brought to New York.

Shares of defense giant Lockheed Martin fell 4.8%, Northrop Grumman slid 5.5%, and General Dynamics fell 3.6% during afternoon trading in New York. 

In one of his Truth Social posts, Trump wrote: “I have been informed by the Department of War that Defense Contractor, Raytheon, has been the least responsive to the needs of the Department of War.” Raytheon is a unit of RTX.

Raytheon makes the Patriot missile defense system which has been heavily used in Ukraine, as well as Tomahawk missiles for militaries around the world.

An RTX spokesperson did not immediately comment on Trump’s post which sent shares down 2% before recovering and climbing 2.5% in after-hours trading.

EXECUTIVE ORDER SAYS HEGSETH TO IDENTIFY UNDERPERFORMERS

Trump’s executive order said that effective immediately, defense contractors were not permitted to pay dividends or buy back stock “until such time as they are able to produce a superior product, on time and on budget.”

The order said that within 30 days, Pentagon chief Pete Hegseth will identify defense contractors who are underperforming on their contracts and have engaged in stock buybacks. The Pentagon chief would then engage with those firms, which would have a chance to submit a remediation plan for review by the Pentagon within a 15-day period after the notification, the order added.

If a remediation plan is considered insufficient by the Pentagon chief, steps could be taken by the government to secure remedies, including through enforcement actions, the order said.

Within two months, Hegseth will ensure that any future defense contracts contain provisions prohibiting any stock buyback if the company is underperforming its contract.

“Additionally, the Secretary shall ensure such future contracts stipulate that executive incentive compensation for contractors will not be tied to short-term financial metrics, such as free cash flow or earnings per share driven by stock buybacks, and instead will be linked to on-time delivery,” the order said.

The order directed the U.S. Securities and Exchange Commission to consider issuing regulations to implement the proposed ban.

TRUMP DECRIES EXECUTIVE PAY PACKAGES

Trump also called executive pay packages in the defense industry “exorbitant and unjustifiable,” and said they should be limited to $5 million, far less than what many executives earn.

The CEOs of the top defense companies typically make more than $20 million a year through a combination of cash payments and stock grants. 

Trump did not clarify on social media exactly how the components would be capped but his order said that the Pentagon chief will take steps upon determining underperformance by a contractor to ensure that the government caps executive base salaries at current levels.

The order also said it required that executive incentive compensation under future contracts be tied to on-time delivery, increased production, and operating improvements.

“From this moment forward, these Executives must build NEW and MODERN Production Plants, both for delivering and maintaining this important Equipment, and for building the latest Models of future Military Equipment,” Trump posted without naming specific companies or executives.

Share buybacks are common among defense firms, and several pay a dividend. Lockheed in October, for example, raised its dividend for the 23rd year in a row, to $3.45 per share. At the same time, it authorized the purchase of up to $2 billion of its shares, raising the total amount promised for repurchases to $9.1 billion.

Industry groups had been on high alert about the proposal.

Lockheed’s F-35 fighter jet, one of the most expensive U.S. defense programs, has been plagued by rising costs and delays. Many big defense programs take much longer to deliver a product than initially promised and at a far higher price.

The $140 billion Sentinel intercontinental ballistic missile program that will replace aging Minuteman III missiles, designed and managed by Northrop Grumman, will be years behind schedule and 81% over budget, the U.S. military said last year.

The biggest defense firms, including Lockheed, Northrop Grumman, General Dynamics and Boeing, did not immediately respond to requests for comment.

(Reporting by Mike Stone, Kanishka Singh, Chris Sanders and Katharine Jackson in Washington and Bhargav Acharya in Toronto; Editing by Caitlin Webber, Howard Goller and Lincoln Feast.)