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Raytheon, the defense division of RTX, is one of the key suppliers of Patriots, a critical air and missile defense program for the U.S. military and its allies.
The U.S. defense industry is expected to resist President Donald Trump’s new effort to curb shareholder rewards and limit executive pay, several financial analysts and industry experts say. But the presidential decree still could influence the marketplace.
Critical to determining the new policy’s effect—outlined in a Jan. 7 executive order (EO) from the White House and teased earlier by Trump on social media—will be details of how the Defense Department implements the president’s goals in future contract awards, as well how the U.S. Securities and Exchange Commission (SEC) regulates or administratively penalizes companies. Expected lawsuits in federal courts also will help determine the outcome.
- New policy aims to slash shareholder rewards, executive pay
- Analysts call move unenforceable overreach, but popular
- Industry awaits future regulations and contracting terms
“In essence, the EO serves as a threat to underperforming contractors that are returning capital to shareholders instead of reinvesting in capacity,” BTIG analysts Andre Madrid and Ned Morgan wrote in a Jan. 12 note to investor clients. “However, we note that there are still limits to enforceable legal consequences, even under the Defense Production Act. . . . While this builds off of Trump’s prior commentary, we continue to question the EO’s enforceability and the possibility of this yielding the intended results.”
Madrid and Morgan are far from alone in questioning the EO’s enforceability—or its feasibility of meeting Washington’s long-held goals for more effective defense acquisition. “In theory, we could see more punitive terms on new defense contracts, but major elements would likely need congressional approval and also a resolution of legal challenges,” analysts at Vertical Research Partners led by Robert Stallard said.
“We also struggle to find the avenue to actually implement any of these restrictions,” analysts at Jefferies led by Sheila Kahyaoglu stated. “Would they be written into contracts? It seems to again be an overreach. As we said before, the contractors will likely push back and point to a balanced approach rewarding all stakeholders, which can include investors as well as customer.”
Trump telegraphed the broadside toward the end of December. Finally, in a social media post on Jan. 7, the president called on companies to create new, modern factories before rewarding shareholders. He also said no “executive” should be paid more than $5 million, which itself is a “mere fraction of what they are making now.”
Trump further asserted that “military equipment is not being made fast enough,” and industry must do a better job of maintaining and supporting equipment already fielded, redirecting shareholder returns for these purposes rather than relying on financial or government institutions to do so. He added that he would not permit share buybacks or dividends until the perceived problems are rectified.
Under the EO, the defense secretary has 30 days to identify contractors that are underperforming and not investing in capacity while returning capital to shareholders. An identified contractor would receive notice and have an opportunity to submit a remediation plan, approved by its board of directors, for review by the Pentagon during the 15-day period following notification.
Additionally, the defense, state and commerce secretaries could consider suspending or denying U.S. advocacy for underperforming contractors seeking international work. Per a White House fact sheet, the SEC chairman could “reconsider safe-harbor protections for underperforming defense contractors.”
The fact sheet added that the EO empowers the Pentagon “to take steps to ensure that future contracts . . . upon determining that a contractor is experiencing such issues, cap executive base salaries at current levels (with inflation adjustments permitted).” But there was no further mention of the $5 million limit from Trump’s initial social media post.
In another Jan. 7 post, the president pointed to RTX’s Raytheon as “the least responsive to the needs” of the Defense Department, calling the group “the slowest in increasing their volume, and the most aggressive spending on their shareholders rather than the needs and demands of the United States military.”
RTX did not respond immediately to the president or the EO. The Arlington, Virginia-based corporation kicked off a $10 billion accelerated share repurchase in October 2023 amid Pratt & Whitney geared turbofan powdered metal issues but also as part of an overall promise to reward shareholders with at least $36 billion through last year; then-United Technologies Corp. had acquired Raytheon in April 2020 to form RTX. The group plans to report its latest quarterly earnings and host a teleconference on Jan. 27.
Over the past 20 years, legacy primes have returned $352 billion to shareholders in the form of dividends and share repurchases, accounting for roughly all collective free cash flow over that period, according to BTIG’s Madrid and Morgan.
Analysts believe the attack is aimed at large defense primes, such as RTX, rather than smaller new entrants. Trump has publicly lambasted Lockheed Martin over the F-35 and Boeing over the delayed Air Force One program for years. In his first term, the president explicitly tied defense spending to job creation and called for more hiring and training.
By comparison, defense tech companies such as AeroVironment and Kratos do not pay dividends or buy back stock. Kratos issued a prepared statement after Trump’s attack applauding the president’s efforts. On Bloomberg TV, Anduril cofounder and CEO Palmer Luckey also praised Trump’s policies and criticized legacy primes.
But there are many unresolved questions about the new policy. “What is a ‘defense company?’” Bernstein analysts led by Doug Harned wondered aloud Jan. 8. “While Lockheed and Northrop are certainly defense companies, is GE Aerospace or Howmet Aerospace a defense company, with a minority of sales in defense? This has not been defined, and the targeting of RTX shows that being half commercial is not enough.”
Analysts also noted that the overarching aim to “make more stuff quicker” faces structural challenges in legacy program areas that were not designed for boomlike growth and speed. Those conditions are more achievable in new technology areas, such as space, uncrewed systems and automation, with younger, smaller, nontraditional companies.
Still, large defense prime contractors and major suppliers are likely to downplay the policy in the coming weeks and months as they address investors and analysts in start-of-year quarterly earnings calls. For one, details are sparse about what defines underperforming contractors or how any of the EO will be enforced. Moreover, Trump simultaneously teased a $1.5 trillion defense budget for fiscal 2027, a 50% increase from 2026, and defense industry investors could expect profits from that to far exceed negligible costs from questionable shareholder limitations.
Executives and their lobbyists are expected to reiterate 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 incentivize spending on what officials want them to focus on via multiyear contracts and other explicit funding guarantees. And they stress that industry allocates tens of billions of dollars a year combined in research, development and capital expenditures already.
Analysts say that, depending on how well Trump’s attack on shareholder rewards succeeds, there could be effects on the defense industrial base. For instance, if money really is diverted from shareholders and executives, companies could plow more into mergers and acquisitions. That could bring more vertical integration as primes take more control over their supply chains. Ultimately, that could hamper competition because there would be fewer contenders.
Even if Trump’s effort goes nowhere, the issue is unlikely to die. “Government complaints around defense contractor shareholder returns reemerge every few years,” BTIG’s Madrid and Morgan said, “often to no avail.”
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