Podcast: Trump Vs. Defense Industry

Analyst Byron Callan joins Aviation Week editors to discuss U.S. President Donald Trump’s attack on contractor profits and his plan to boost defense spending by 50%.

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Joe Anselmo: Welcome to this week's Check 6 podcast. I'm Joe Anselmo, Aviation Week's editorial director. U.S. President Donald Trump certainly has the attention of the defense industry, and I'm not talking about Venezuela, Greenland, or Iran. Last week, he slammed defense contractors for not reinvesting enough of their profits and announced he would ban dividends and share buybacks and limit executive compensation to $5 million. He singled out Raytheon for a particular scorn. That sent defense stocks reeling. 

Then, several hours later, the president announced plans to increase the U.S. defense budget by a staggering 50% to $1.5 trillion a year. Joining us to help parse all of this is Byron Callan, managing director at Capital Alpha Partners and a guest columnist for Aviation Week. Also on the podcast are two of our senior editors, business editor Michael Bruno and defense and space editor Robert Wall. 

Michael, this friction between government and contractors over profits is certainly nothing new. Trump just upped the ante, didn't he?

Michael Bruno: He did. He did. But this is a story that is a gift that keeps on giving because it's been a concern for both industry and the government going back to the Cold War days and ideas of complaints about $600 hammers and all that stuff. In fact, when I joined Aviation Week in 2005, Joe, your predecessor, Tony Velocci, was telling me all about shareholder complaints in industry at the time. And so this story pops up every couple of years and there are different iterations of it. We've seen complaints from Congress or the White House about how much shareholders are getting returned from industry for a very long time. Just recently actually, in the sense of right before COVID, if anybody remembers, the executives at TransDigm got hauled in front of Congress to talk about whether they were profiting too much and whether their pay needed to be restricted.

There have been efforts specifically from Democrat lawmakers last decade to try to cap executive pay based on how much they get reimbursed through government contracting. So this pops up every once in a while, but what's different this time is that the president himself has directly, both in his own social media posts, so his own words direct from the president, but also now there's an actual executive order that does state the goal. And we can talk about this a little bit more in a moment. This is a goal that's been stated. One of the things that's very unclear for everybody is how this would actually all get enforced. But that could be a whole other podcast by itself. But I will just say that this is now going to be something that is going to be very, very important and maybe even concerning for industry. Here we are at the start of 2026.

All the companies starting with the large defense primes are about to start reporting their year-end results and their year-ahead forecasts. And they're going to get asked about shareholder returns and about executive compensation in the quarterly calls that are coming up. So this is guaranteed to be in the news cycle for at least another month or so.

Joe Anselmo: Byron, what are your thoughts on all this? You've followed this industry for decades.

Byron Callan: Yeah, I was going to say, Michael, I agree. I mean, it's been a source of tension. I'd go back even further. I mean, you could look at, there's an Army history of aircraft procurement during the Second World War, and we didn't have share buybacks and dividends as an issue, but there was a lot of tension between the Army Air Corps and contractors in 1940 and 1941 on how much would they invest? Who would bear the risk for those investments? And so I think it's fascinating to see this tension played out in a different manner, because really it's a question about you're asking contractors to add more plant capacity at a time when there may well be uncertainty in 2028 or '29 or 2030, and they do have to earn a return or they should be able to earn a return on that investment. And I would agree it is different because the president has weighed in on this.

There have been times when dividend policies have come under pressure. I think McDonnell Douglas faced this in the early 1990s when they ran into all sorts of trouble on the C-17 program. There were accelerated contract payments made, and I think there was an exchange in actually cutting the dividend in exchange for that, basically financial aid from the Department of Defense. But this is different. I absolutely agree it's going to be a subject in the earnings calls, but I'd also make two points here. US defense contractors are not unique in buying back stock. Most publicly traded companies, including some of the tech darlings like Apple and Nvidia, have been repurchasing shares. We could always argue, is that an optimal use of their free cash flow? But these are companies that are publicly traded. They have board members who come from other parts of industry. So for better or for worse, it is a way that U.S. companies and frankly UK companies also do business.

And the other part that I just like to put on the table, you can look at dividend payments, but you almost have to look at the yield of that dividend. So think of the yield that you might get on your savings account or something. The yields, if you take the dividends and divide it by the stock price, they're really not out of line with what we see from other major industrial companies in the United States and frankly around the world. As a matter of fact, on a global basis, if you compare to some of the European names, the U.S. dividend yields are a bit lower. And this is a way to return capital to shareholders. It's not just how high the stock price goes. In low-growth sectors or places that are fairly mature, dividend payments are a way to attract investors to stock. And there are portfolios in the institutional investor world that will just hold companies based on their dividends or dividend yield.

Joe Anselmo: And Byron, for those members of our audience who aren't experts in business, I mean, aren't defense profit margins generally lower than a lot of what you see on the commercial side of the industry? I mean, they're not making massive...

Byron Callan: Yeah, I mean, it's a different business model and I think this is another source of tension that you've seen arise as you've had these defense entrants like Palantir and Anduril. They have been critical of the investment practices of really the Department of Defense and the contractors. Those companies have been willing to commit their own funds to develop new defense programs or services products, but they've been earning much higher margins because they're selling these products on a commercial basis. The model that, again, for better or for worse, that we've seen in the defense area is the federal government pays for a lot of the research and development, and therefore that burden is not borne by contractors, but they accept far lower margins than you see, for example, in technology companies. So if you want to change that, fine, but then you have to have a willingness to see much higher operating margins on defense contracts and companies will have to take more risk.

And that's a trade-off that's probably better discussed in Washington, D.C. than just on a podcast.

Joe Anselmo: Robert, let's bring you into the conversation. You've covered the defense industry for the better part of three decades. What are your thoughts on this?

Robert Wall: I mean, it's fascinating. And there's so many ways to attack what's going on here. I mean, one thing I was just going to mention is, I mean, what is a defense company? You mentioned the attack on Raytheon. All of us who've listened to an RTX, the parent company earnings call these days, what, 95% of that call is about the Geared Turbofan and its commercial aircraft engine business. It's not about defense. I listen to these calls largely because I'm hoping to hear something on defense or space, and maybe I'll get lucky and I'll get one question. So I think that's a huge issue you have to think about. The other thing, of course, is the investors are... These are individual investors to some extent. Dividends is why they invest in these companies. It's very different than the Andurils who are backed by venture capital firms who have a very different mindset, what they want out of their companies.

So again, it's just different, but I'm just going to actually pick on the government on this I mean, if you want companies to invest, you need to give them a sense of where you're going with your plans. You need to give them some sense. I mean, it's going to take billions and years to build up this capacity, and especially some of the smaller suppliers who aren't as rich as the primes. For them, investing is hard. It's not easy for them to always get loans, the third-tier supplier or fourth-tier supplier. And the Pentagon can't be bothered to put together a future years defense plan. Budgeting is done basically ad hoc. The annual budget process has become a joke. I mean, if you are a small company that wants to take out a loan, you would like to know that what you are taking this loan out for in a few years' time, that there's going to be a return on investment.

Otherwise, you're putting your company at risk. And if the Pentagon, the administration, whatever it is, whichever administration it is, if the government, including Congress, can't get their act together to put in place these things for companies to go to their banks and get the money to make the investments, then I think it's pretty rich to beat them up like this.

Joe Anselmo: None of us are lawyers, but can the president actually do this? I mean, Byron, what happens if shareholders come and challenge this attempt to limit their returns?

Byron Callan: Well, yeah, because actually you're right. I'm not a lawyer either, but I will say things like executive compensation and dividend levels and share repurchases, they're approved by the board of directors at these companies and boards are elected by shareholders. So like I mentioned, there's been some precedent of this, but usually when a contractor has really experienced financial duress, and I understand that kind of trade-off, if we're going to give you money, we don't expect you to turn around and pay dividends when you're getting a break from the department. This is different though. And the way Michael framed it, if what you're trying to get companies to do is invest in more capacity without a promise of having that capacity filled, it's just been another chapter in a long book of these types of tensions and how it plays out. And I don't think it necessarily... I mean, my own view in going into this earnings season, I don't think contractors can ignore it.

Maybe you'll see something like one or two might say, "We're going to suspend our share repurchases until we have a better dialogue and understanding about what exactly the department wants and we can present our case." But I'd really be surprised if all of a sudden share buybacks and dividends are eliminated. I'll say one other point, $5 million sounds like a lot, maybe to many listeners on this podcast, but I also feel that if you look at executive compensation in the United States, these companies do have to be competitive with other sectors because management can be lured to other companies and/or I think we've seen recently, Northrop Grumman had a fairly significant hire from outside the defense sector. So as much as this is a business that is driven by patriotism, at the end of the day, people are also going to make economic decisions about how they should be fairly compensated.

And if you've capped executive compensation well below what the rest of the economy is paying, you could see a flight of talent.

Michael Bruno: So Joe, I will jump in and dare to say that I believe the reaction so far from industry is to be quietly dismissive of the president's efforts here. It's well understood that this is an election year and a lot of things are getting talked about. We're recording this podcast on a day when the president made headlines about capping interest rates on credit cards. So there's just a lot of news flow happening, and we're going to see a lot more of it until we get to the congressional midterm elections. But other reasons for why industry is going to be quietly dismissive about it, because even if you go through that executive order, it's very unclear how this will get enforced. It's very unclear how things get defined. Robert absolutely laid out one of the major questions, who's a defense company? Is GE Aerospace a defense company?

Would you really risk the major leading engine provider across the entire Western aerospace sector because there's a defense program somewhere that may not be right on time exactly? Is that worth the cost? And if you don't actually apply the law fairly, of course, everyone else in industry is going to be up in arms and sue over it. There are other questions about how do you allocate blame? If GE Aerospace or Boeing or Lockheed is having a problem, but it's a supplier who is actually the problem on a program, how does this get allocated? And none of that gets spelled out in the White House order. The last reason why industry is going to be quietly dismissive of this is that the eye is on the prize, right? We can have a whole separate podcast about whether there's going to be a $1.5 trillion budget or not, but we know that defense budgets are probably going to keep going up for a while, partly because everybody in Congress seems to really like that idea too.

I mean, we went through last decade with the whole sequestration shenanigans and what did Congress do on its own every time? They just came to an agreement to raise the cap by half. So you give lawmakers an opportunity to raise the budget, they'll do it. President Trump wants to raise the budget, they'll do it. And that is where everybody as an industry is going to win in the end if the budget keeps going up. And that by all indication seems to be what's going to happen.

Joe Anselmo: Let's talk about that $1.5 trillion budget because I've always thought with Donald Trump, you should look at what he does more than what he says. He says a lot. I mean, Byron, a trillion and a half dollars, another $500 billion, I mean, where would all this money go and how could the industry even absorb it?

Byron Callan: Well, it's a really interesting question because again, we're only really working off the president's social media post. I think there are a lot of questions about it. The first question, is he expecting this to be done through another reconciliation bill that Congress would have to pass? The reconciliation rules basically say that spending has to be deficit neutral. So if you're going to increase defense by $500 or $650 billion, I mentioned that latter number because that would be off the discretionary line. Where's that money going to come from if you have to find offsets? Now, he did indicate that tariffs could be used, but the mid-session review that the White House issued or the OMB issued in September showed tariff collections running around $400 billion a year up to, I think, $530 or $540 by 2035. So I'm not aware of what would've changed between September when that was issued.

And then the president's comment said, "Oh, this is going to be paid for by tariffs." As a matter of fact, we might have a Supreme Court ruling on January 13th that could at least upset part of that tariff apple cart. And then I think the other question to ask is, when you looked at the way the reconciliation bill was written and that included $1,150 billion, that was really money that was going to be spread out over a number of years. Things like shipbuilding, it's not like these contractors should all be preparing for 50% revenue growth. Actually, it's probably going to be higher because I don't know how you would increase the military personnel budget by 50%. The defense health program, which is included in operations and maintenance by 50%. So if that number actually was true, the growth rates for procurement, RDT&E and swaths of the operations and maintenance budget are going to have to grow faster than that 50% number.

And maybe, yes, it's a midterm election year. I wonder if the president proposes this 50% increase, and then there are cuts that are offsetting this that take place to non-defense discretionary programs or even mandatory programs like Social Security or Medicare. What are the optics of that in an election year and how would that affect the outcome of the midterm election? So the stocks had reacted very positively to this, although obviously we had some geopolitical developments as well too. I'm a little more cautious until I see the details of exactly how this would play out. And then really, what's the laydown of it? If it's going to happen, you're still going to need Congress to pass it. We saw plans earlier this year, the Republicans in the Senate wanted to add $30 billion to the defense budget request. We're probably in the $8 billion range, at least looking at what the authorizers have done.

So I'd be careful with assuming that there's going to be this giant windfall for U.S. defense contractors.

Joe Anselmo: Robert, what are your thoughts on a $1.5 trillion defense budget?

Robert Wall: Yeah, it just takes me back to what I was saying earlier. If you're making a business plan, you want to know that there's some certainty against what your customer's up to and some... And that just doesn't exist. Someone throws out an arbitrary number like this, and it actually, I think it's almost detrimental to the cause. So if you're a CFO, if you're a CEO, and you have to think, okay, even if this... It's not going to happen, but even if the figure came up, is it sustainable for a year? Well, you don't build plants for a year. You want to know that if you go up in a rate in production to a new level and you have to invest in that, that you're at that level for a couple of years so as to make sure you can recuperate that investment. I think this is, just as I said, it's just more of the same.

It's ad hoc that's really not helpful to the stated ambition of actually convincing the defense industrial base that they need to do more, or the traditional defense industrial base, I should say.

Joe Anselmo: And Robert, you're sitting in London. I said at the beginning, this wasn't about Greenland, but I do want to ask you about the president and the administration are refusing to rule out taking Greenland by force, which would constitute an attack on a NATO ally. I mean, if the US did take Greenland by force, what are the downsides to that for the transatlantic defense industry?

Robert Wall: I mean, so far what's been very interesting in the last couple of months, the Europeans have been very careful to not... Even when they've signaled we need to do more in Europe and with Europe and buy more European, not to say that this would come at the cost of the U.S. So the Germans have said, "We're buying more Eurofighters, but we're also interested in maybe more F-35s, the Danes themselves, but that's starting to change, right? The Danes had an air defense decision. They went with SAMP/T, the European system. They didn't go with Patriot. And I think something like this would be a bit of a watershed. I mean, to some extent, it'll take Europe some time to get there where they will have replacement systems, but they are working on them. And I think what people are perhaps not quite understanding is I think the damage is lasting.

I've been over here a long time and I still very well remember when I first moved to Europe with Aviation Week, some of the French companies were touting ITAR-free products and everyone laughed except the French, of course, because it wasn't a serious issue. It was a marketing gimmick, marketing ploy. No one's laughing anymore. ITAR-free is a real something people here are really thinking about. How do we build equipment where the U.S. has no say and has no control? And yes, we've not yet seen an F-35 cancellation or something of that magnitude, part because no one wants to deal with the blowback. But at some point, even in Europe, which is a bit of a pushover, it has been a bit of a pushover, I would agree, but even in Europe at some point, enough is enough, and this might just be it. 

Joe Anselmo: Byron, what are your thoughts on that?

Byron Callan: I agree very much with the way Robert laid this out. I think we've seen some cracks in this, the decision basically not to go with the E-7 and go with a European solution, replace AWACS, but I'm hearing the same thing. I mean, there has been a desire. And it kind of went back to the vice president's speech a year ago at Munich Security Conference. We're really kind of set a lot of Europeans at the edge of their seat about the US security commitment. I think a military seizure of Greenland would basically gut NATO, particularly if Denmark invoked Article V and nothing happens, that's the end of the alliance. I mean, there'll be another security arrangement that'll emerge with Europe, and there will be ramifications. I don't know. A lot of the defense trade is based on trust, the trust that you're going to get supplies and support when a conflict emerges.

And if you think your vendors are not going to be there or the technology's going to be cut off, you're going to look at other sources. So I do worry about this. I'm hopeful that a lot of this is just a negotiating posture, that maybe there are maximalist positions being put forth on Greenland and that the worst won't happen, which would be a U.S. military seizure of Greenland. Because if it does, I really think it's going to be far more detrimental to American contractors and American defense exports than people are now assuming. 

Joe Anselmo: Michael, we are just about out of time. Any final thoughts?

Michael Bruno: Yeah. I would pile on to what Robert and Byron started and at the risk of sounding hyperbolic, a U,S. military occupation of Greenland could also be a constitutional crisis at home. If you're putting boots on the ground to occupy foreign territory under an undeclared war, I think you're going to have a real problem. And that comes back to industry because part of the very fragile sort of landscape we have right now is that everyone's kind of on board with increasing defense spending even more. But if you dramatically upset that apple cart, it starts to bring everything else back into question. And that uncertainty, remember, these are businesses we're talking about and all they want more than anything else is certainty. And a Greenland operation would bring the exact opposite of—

Joe Anselmo: Well, on that note, we're going to have to wrap up, but I'd like to thank you and Robert for joining us. Byron, always great to have you on Check 6. Looking forward to your next Aviation Week column. Thank you. To our audience, we are actually going to have two Check 6's this week because Airbus and Boeing are releasing their delivery numbers for the year. So stay tuned for a podcast on that in a couple of days with Jens Flottau, our senior commercial editor. But for now, that is a wrap for this week's Check 6. Thank you for your time and have a great day.