Trump Targets Shareholder Payouts Amid Rising Costs and Delays in U.S. Defense Contracts

Summary:

President Trump is preparing an executive order to curb shareholder rewards and executive compensation for defense firms with over-budget, delayed projects, intensifying scrutiny of a sector plagued by inefficiencies....

Executive Order Aims to Rein in Defense Sector Excess

The Trump administration is advancing a draft executive order that would restrict stock buybacks, dividend payouts, and executive compensation at major U.S. defense firms if their government contracts face significant cost overruns or schedule delays. According to three confidential sources briefed on the initiative, the order is part of a broader push by the White House and Treasury Department to reform an industry that has long been criticized for inefficiency and inflated costs.

While the exact wording of the order remains fluid and no formal announcement has been made, the measure represents a major policy pivot. It is intended to align contractor behavior with performance-based accountability, leveraging financial incentives to address longstanding procurement challenges.

Market Reaction and Industry Concerns

News of the potential order sent defense stocks lower in after-hours trading. Lockheed Martin fell 1.6%, while Northrop Grumman dropped 2%, underscoring investor concerns about the impact on capital return policies. These firms regularly engage in share buybacks and dividends. Lockheed, for instance, increased its dividend to $3.45 per share in October marking 23 consecutive annual hikes and approved up to $2 billion in additional share repurchases, raising the total authorization to $9.1 billion.

The proposed restrictions suggest a direct link between corporate governance decisions and contract performance metrics. If implemented, they could significantly alter how defense firms prioritize shareholder returns during underperforming project cycles.

Chronic Overruns and Delays Prompt Action

The policy effort is rooted in growing frustration with escalating defense project costs. Lockheed’s F-35 fighter jet program has long symbolized cost bloat, while Northrop Grumman’s $140 billion Sentinel intercontinental ballistic missile program is now projected to arrive years late and 81% over budget, according to U.S. military data.

These issues are not isolated. Across the board, major weapons programs frequently exceed both time and cost estimates, raising questions about procurement oversight and contractor accountability. The administration’s new order seeks to reintroduce financial discipline and deter excessive spending by tying corporate rewards to program efficiency.

Broader Pentagon Reforms to Procurement

This executive order would complement sweeping procurement reforms introduced by Secretary of Defense Pete Hegseth in November, following a separate executive order signed by Trump in April. These changes streamline acquisition authority, reduce bureaucracy, and grant the Pentagon more direct control over major weapons programs.

According to Hegseth, the reforms address “unacceptably slow” procurement processes blamed on fragmented oversight and misaligned incentives. The changes are designed to enable faster deployment of military technology in response to evolving threats, including in cyber, aerospace, and missile systems.

Industry Pushback and Regulatory Reform Demands

While the administration tightens control over contractor behavior, defense industry groups have lobbied for the opposite. In June, the Aerospace Industries Association, representing giants like Boeing, RTX, and General Dynamics, submitted a letter to Secretary Hegseth urging the elimination of more than 50 regulatory requirements. These include rules on cybersecurity compliance, cost accounting, IP rights, and commercial acquisition regulations the group argues deter innovation and drive up costs.

This regulatory friction reflects a tension between the government's demand for efficiency and the industry's desire for flexibility. The potential executive order appears to be a turning point, signaling that fiscal discipline may now be enforced more aggressively.

The Trump administration’s expected executive order targeting defense firms’ shareholder returns introduces a new enforcement mechanism in the ongoing battle over procurement reform. By penalizing financial rewards during periods of contract underperformance, the policy would shift incentives within an industry historically shielded from such accountability. While the market response has already shown signs of concern, the broader implications may reshape defense contractor behavior and project governance for years to come. As the defense sector awaits final language from the White House, companies will be forced to re-evaluate the balance between investor expectations and government performance metrics.

Source: Reuters

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