Investors in defence stocks wary as Trump places new limits on CEO pay and dividends

A variant of the Light Armoured Vehicles, similar to those ordered by the Canadian Armed Forces, sits inside the General Dynamics Land Systems-Canada factory in London, Ont. The Canadian Press/Geoff Robins

Investors in defence contractors worry that a White House order restricting CEO pay, dividends and stock buybacks could reduce returns for shareholders and impede the companies’ ability to attract the best executives.

U.S. President Donald Trump issued an executive order on Jan. 7 prohibiting defence contractors from paying dividends or buying back shares “until such time as they are able to produce a superior product, on time and on budget.” Separately Trump also said annual CEO payouts should be limited to US$5 million.

Although Trump said he would dramatically boost federal defence spending, investors said they were dismayed by what they characterized as heavy-handed federal meddling in an industry whose payouts are in line with other big U.S. corporations, a Reuters analysis found.

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“In the big picture on defence, it’s a step forward on defence spending. However, the micromanaging of capital allocation is three-quarters of a step back,” said David Sowerby, managing director of Ancora Advisors, a registered investment adviser with about 148,000 shares in General Dynamics.

Sowerby said he worries Trump’s approach could lead the best executives to go to other industries and distort shareholder value.

“If he wants to restrict salaries (and other pay) at $5 million, where does it stop?” Sowerby said.

Capital spending

Charles Lieberman, chief investment officer of Advisors Capital Management of New Jersey, said Trump’s orders suggest companies are holding back on capital spending to pay shareholders and executives instead.

The real problem, he said, is that there aren’t enough orders to justify spending more on plants. He owns the stocks of several defence contractors, including 350,000 shares of RTX and about 52,000 shares of Lockheed Martin and plans to add more military contractors as the U.S. and Europe up their defence spending.

“Nobody reinvests in the business unless they have the orders to buy the product,” he said. While the U.S. does face ammunition shortages, each company already has enough cash to build new factories even at their current payout rates, he said.

“Cash flow is not a constraint,” Lieberman said.

Trump’s order follows other pressure on public companies like the government’s taking of a 10 per cent stake in chipmaker Intel.

Pentagon officials did not respond to questions for this article.

White House spokesperson Anna Kelly said “President Trump has been clear that all defence contractors should be prioritizing the on-time delivery of weapons to our warfighters over their own stock buybacks, excessive corporate dividends, and inflated executive salaries. If defence contractors refuse to honor their commitments to our military, there will be consequences.”

Committed to the dividend

Christopher Calio, CEO of Tomahawk missile maker RTX, told investors that “we remain committed to the dividend.”

“We’re comfortable we can accommodate both that and the investment needs that come with delivering the current backlog and the potential future volumes on key programs,” he said on a Jan. 27 earnings call.

Northrop Chief Financial Officer John Greene told investors last week it doesn’t plan to buy more stock and will review and approve its dividend plan when its board meets in May.

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Many top defence contractors paid dividends even during World War Two, according to University of North Carolina historian Mark Wilson. But as their primary customer, the Pentagon has great leverage through contract language over how the companies deploy capital.

Defence and aerospace management consultant Richard Aboulafia said limiting dividends could disproportionately hurt older, more established companies that have become reliable sources of income for investors.

“If you penalize the legacy defence companies, then you’re shifting investment sentiment across to the new guys you’re trying to encourage,” he said. “You’re penalizing the Lockheeds and Northrops of the group, but in relative terms you’re making the guys who don’t pay dividends or buy back stock relatively better.”

Companies that stand to benefit, he said, could include closely-held drone maker General Atomics, and Palantir Technologies of Denver.

Average payouts

Pay for defence CEOs is roughly in line with other large, publicly traded companies.

The median CEO pay at 10 of the largest publicly traded defence contractors was $19 million in 2024, on par with other similarly sized companies and about $2 million more than the median compensation for all S&P 500 companies, said Courtney Yu, research director of executive compensation research firm Equilar.

On payouts to investors, the share of dividends and buybacks relative to net income for the five years ended Dec. 31, 2024 was 250 per cent at RTX, 121 per cent at Lockheed Martin, 74 per cent at General Dynamics, and 72 per cent at Northrop Grumman, according to William Lazonick, an economist who runs the nonprofit Academic-Industry Research Network.

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Boeing, still recovering from its 737 Max troubles, paid out hardly any dividends and did no buybacks in the period.

In comparison, the 500 highest-revenue U.S. companies during the same period paid out an average of 87 per cent.

(Reporting by Ross Kerber in Boston; Editing by Dawn Kopecki and Nick Zieminski)