Donald Trump’s sweeping order for US defence companies to invest more in new factories or be forced to limit shareholder returns is fraught with risk, industry experts have warned.
The US president’s executive order on Wednesday outlined curbs on dividend payments, share buybacks and executive pay but offered little guidance or detail of how performance might be judged, or how penalties could be imposed.
The order was swiftly followed by Trump’s call for Congress to boost military spending by 50 per cent to $1.5 trillion for 2027.
The threat of drastic curtailment of shareholder and executive rewards, coupled with a potential boom in spending, has left the defence sector in limbo and investors on edge.
“If the shareholder view is that the carrot is always out there somewhere in the future but the industry will keep getting beaten with a stick, then there is a danger that this drives capital out of these businesses — not into them,” said Byron Callan, analyst at Capital Alpha Partners.
Trump has launched frequent attacks on the industry over delayed and over-budget programmes.
The president has repeatedly called for a better-funded military with recent actions, including in Venezuela, underlining 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 criticised for not investing enough of their own capital in expanding production, amid surging demand in particular for missiles following Russia’s invasion of Ukraine four years ago.
Trump described the pay packages of defence executives as “exorbitant and unjustifiable” in a social media post on Wednesday before issuing the executive order for companies to build new plants to deliver and maintain this “important equipment”. In his post, Trump capped potential pay at $5mn a year — a “mere fraction” of current levels — until new modern production facilities are built.
Shareholder returns by the largest defence companies outpaced investment over 2023 and 2024, according to analysts at Jefferies. The companies returned close to $50bn to shareholders while reinvesting $39bn over the two-year period. However, some of the companies — notably RTX — also have significant commercial operations. Boeing returned no capital as it has focused on rebuilding its balance sheet.
Defence shares that had fallen immediately after the dividend threat jumped sharply on Thursday on news of the potential increase in the Pentagon’s budget. Shares in RTX, whose defence business Raytheon had been singled out by Trump on Wednesday in a separate social media post for failing to invest in new factories, also rose before giving up gains.
Jerry McGinn, a former Northrop Grumman executive and director of the centre for the industrial base at the CSIS think-tank in Washington, noted that despite Trump’s threats, his administration had recognised the need for the US government to offer better incentives for defence 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 defence contracts for such a programme.
“We will award companies bigger, longer contracts for proven systems so those companies will be confident in investing more to grow the industrial base that supplies our weapons systems more and faster,” Trump’s defence secretary Pete Hegseth said.
Eric Fanning, president of trade body the 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 drive 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 stipulates that Hegseth has 30 days from January 7 to review the performance of contractors and identify any falling short, including from “underperforming” on their contracts to failing to invest in production capacity.
If remediation measures fail, Hegseth can use a number of legal and regulatory channels, such as the Defense Production Act, to initiate “immediate actions to secure remedies”.
According to the order, Hegseth has 60 days to ensure that any future contract contains a provision prohibiting any share buybacks and dividends during a “performance of underperformance, non-compliance with the contractor’s contract, insufficient prioritisation of the contract, insufficient investment, or insufficient production speed as determined by the Secretary”.
The order also mandates that executive compensation be tied to non-traditional financial metrics such as on-time delivery and increased production.
However, analysts said it was unclear what legal basis the government has to enforce capital return restrictions. The order “leaves out details or benchmarks, but makes a strong push to tie the ability to buy back stock and pay dividends to contract performance”, said Jefferies analyst Sheila Kahyaoglu in a note.
Callan of Capital Alpha warned that limiting executive pay could affect the ability of companies to “recruit and retain senior executives”. Companies “may have to do something symbolic” when they announce results for the full year in the coming weeks, such as suspending share buybacks, he said.
It is not clear which businesses are included in the order, which appears to be aimed at publicly traded companies in the US. Several foreign groups, however — notably Britain’s BAE Systems — have sizeable US operations.
For investors in the established contractors, the concern is that Trump’s intervention could change the investment case for these companies, traditional “value stocks”.
Kristine Liwag, a Morgan Stanley analyst, noted that “capital return is a central part of the US defence investment case,” and that “limiting capital return would undermine one of the sector’s primary differentiators versus other industrial and commercial end markets.”
But she also said that while “a limit on capital return is an incremental negative, the size is manageable,” adding that a potential US annual defence budget of $1.5tn would outweigh the possible negative ramifications of any capital return restrictions.
In the meantime, said McGinn of CSIS, companies would likely hold off on dividends and buybacks in the near term in order to avoid a political backlash. But in the absence of the right incentives from the Pentagon, “they’re not going to throw money down a hole because the government tells them to.”
Data visualisation by Clara Murray in London
