Trump blocks defence company payouts until arms production speeds up
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US President Donald Trump criticised the speed of production and maintenance by US defence companies in a social media post.
PHOTO: AFP
- Trump threatens to cap defence contractor executive pay at $5 million and halt dividends/buybacks until production and maintenance improve.
- Trump accuses defence firms of prioritising profits over investment in plants and equipment, demanding faster equipment delivery.
- Defence stocks, including Lockheed Martin and Northrop Grumman, fell following Trump's announcement hinting at a White House executive order.
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WASHINGTON – US President Donald Trump vowed to block defence 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 defence stocks lower and signalled sweeping changes for America’s military-industrial complex.
Mr Trump and the Pentagon have criticised the defence 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 defence contractors have been incentivised to prioritise investor returns over the nation’s warfighters,” Mr Trump said in his executive order released by the White House on Jan 7.
Mr Trump expressed similar sentiment earlier on the afternoon of Jan 7 on social media. Defence stocks fell after his posts, reversing recent gains following the use of US military equipment to capture Venezuelan President Nicolas Maduro and his wife,
Shares of defence giant Lockheed Martin fell 4.8 per cent, Northrop Grumman slid 5.5 per cent, and General Dynamics fell 3.6 per cent during afternoon trading in New York.
In one of his Truth Social posts, Mr Trump wrote: “I have been informed by the Department of War that Defence 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 defence 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 Mr Trump’s post, which sent shares down 2 per cent before recovering and climbing 2.5 per cent in after-hours trading.
Executive order says Hegseth to identify underperformers
Mr Trump’s executive order said that effective immediately, defence 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 defence 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, Mr Hegseth will ensure that any future defence 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 US Securities and Exchange Commission to consider issuing regulations to implement the proposed ban.
Trump decries executive pay packages
Mr Trump also called executive pay packages in the defence industry “exorbitant and unjustifiable”, and said they should be limited to US$5 million (S$6.4 million), far less than what many executives earn.
The chief executives of the top defence companies typically make more than US$20 million a year through a combination of cash payments and stock grants.
Mr 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,” Mr Trump posted without naming specific companies or executives.
Share buybacks are common among defence firms, and several pay a dividend. Lockheed in October, for example, raised its dividend for a 23rd year in a row, to US$3.45 a share. At the same time, it authorised the purchase of up to US$2 billion of its shares, raising the total amount promised for repurchases to US$9.1 billion.
Industry groups had been on high alert about the proposal.
Lockheed’s F-35 fighter jet, one of the most expensive US defence programmes, has been plagued by rising costs and delays.
Many big defence programmes take much longer to deliver a product than initially promised and at a far higher price. The US$140 billion Sentinel intercontinental ballistic missile programme that will replace ageing Minuteman III missiles, designed and managed by Northrop Grumman, will be years behind schedule and 81 per cent over budget, the US military said in 2025.
The biggest defence firms, including Lockheed, Northrop Grumman, General Dynamics and Boeing, did not immediately respond to requests for comment. REUTERS
