Trump Attacks Defense Industry Shareholder Rewards

Share prices of leading large U.S. aerospace and defense prime contractors dropped significantly in regular stock market trading Jan. 7, losing 2-5% generally, after President Donald Trump attacked their share buyback and executive pay practices.

The broadside against the primes–rumored for weeks but finally voiced by the president himself in a social media posting–called on the companies to create new, modern factories before rewarding shareholders. Trump also said no “Executive” should be paid more than $5 million, which itself is a “mere fraction of what they are making now.”

Trump also said “military equipment is not being made fast enough,” and industry must do a better job of maintaining and supporting equipment already fielded. Companies should redirect shareholder returns for these purposes rather than rely on financial institutions or the government to do so.

In the post, Trump said he would not permit share buybacks or dividends until the perceived problems are rectified. More details were not provided. “Thank you for your attention to this matter,” the president said at the end of his post.

Starting later this month, publicly traded aerospace and defense companies are expected to issue their year-ahead financial forecasts and outline plans on other issues such as paying dividends and buying back shares in the stock markets. Practically every major industrial player has an active shareholder-reward program ongoing already.

Large-capital primes have returned a total of $352 billion to shareholders over the last 20 years in the form of dividends and buybacks, according to BTIG Research and Strategy analysts.

Industry has been awaiting something from Trump after rumors started being reported late last year that the White House was working on a related executive order against shareholder rewards.

For their part, companies and their lobbyists have long asserted that publicly traded companies have an obligation to return gains to shareholders–many of whom are also employees–as well as pay off debts. Industry players also have called on the government to better incentivize spending on whatever officials want them to focus on via multiyear contracts and other explicit guarantees of spending. They also note that industry allocates tens of billions of dollars a year combined in research, development and capital expenditures.

Wall Street analysts expect companies to oppose the push. “This seems to be an overreach, and, in our view, the contractors don’t need to be regulated given contract structure and clearer demand signals self-regulate investments,” analysts at Jefferies said in a mid-December report to investor clients when rumors started emerging. “The contractors will likely push back and point to a balanced approach between rewarding all stakeholders, which can include investors as well as customers.”