BY MIRABEL ODETA
Investors in major U.S. defense contractors are growing increasingly uneasy after President Donald Trump issued a sweeping executive order that restricts executive pay and limits shareholder payouts, raising concerns about reduced returns and the industry’s ability to attract top-tier leadership.
The executive order, signed on January 7, bars defense contractors from paying dividends or conducting stock buybacks “until such time as they are able to produce a superior product, on time and on budget.” Trump also separately stated that annual compensation for chief executives at defense firms should be capped at $5 million. While the president has repeatedly pledged to sharply increase federal defense spending, many investors see the new restrictions as heavy-handed government intervention in an industry whose compensation and payout practices generally align with those of other large U.S. corporations.
Market participants argue that the order sends mixed signals. On one hand, higher defense spending could mean more contracts and revenue growth. On the other, tighter controls on how companies reward shareholders and executives may undermine confidence in the sector. Some investors worry that such policies could discourage reinvestment, distort capital allocation decisions, and ultimately weigh on stock performance.
David Sowerby, managing director at Ancora Advisors, said the broader push to strengthen defense spending is positive, but the level of micromanagement is troubling. Ancora holds about 148,000 shares of General Dynamics. Sowerby warned that restricting executive compensation and shareholder returns could drive highly qualified leaders toward less regulated industries and erode shareholder value over time. He also questioned where the limits might end if compensation caps are imposed by executive order.
Others see the administration’s move as a response to concerns that defense companies prioritize payouts over investment. Charles Lieberman, chief investment officer at Advisors Capital Management in New Jersey, said the orders suggest the White House believes contractors are holding back on capital spending in favor of enriching shareholders and executives. Lieberman owns significant stakes in several defense firms, including hundreds of thousands of shares in RTX and tens of thousands in Lockheed Martin, and plans to expand his holdings as U.S. and European governments increase defense budgets.
Lieberman, however, disputes the notion that payouts are preventing investment. He argues that the real constraint is not cash flow but demand. Without sufficient orders, companies have little incentive to build new plants or expand capacity. Even with known issues such as ammunition shortages, he said most major contractors already have ample cash to invest in new facilities if and when orders justify it.
The executive order is part of a broader pattern of increased government involvement in corporate decision-making, following moves such as the federal government taking a 10% stake in chipmaker Intel. Pentagon officials declined to comment on the order, but the White House defended the policy. Spokesperson Anna Kelly said the president expects defense contractors to prioritize timely delivery of weapons to U.S. forces over stock buybacks, large dividends, and what the administration views as excessive executive pay, adding that companies that fail to meet their commitments could face consequences.
Some defense firms have sought to reassure investors. RTX Chief Executive Christopher Calio told analysts that the company remains committed to maintaining its dividend and believes it can balance shareholder payouts with the investment needed to meet current backlogs and potential future demand. Northrop Grumman’s Chief Financial Officer John Greene said the company does not plan additional stock buybacks and will revisit its dividend policy when its board meets later this year.
Historically, dividend payments by defense contractors are not unusual, even during periods of intense military demand. According to historian Mark Wilson of the University of North Carolina, many top defense firms continued paying dividends during World War Two. Still, as the industry’s primary customer, the Pentagon wields significant influence through contract terms that can shape how companies deploy their capital.
Industry analysts caution that dividend restrictions could have unintended consequences. Richard Aboulafia, a defense and aerospace management consultant, said limiting payouts may disproportionately harm mature, established contractors that investors rely on for steady income. He warned that such policies could shift investment toward newer firms that do not pay dividends or conduct buybacks, potentially disadvantaging legacy players like Lockheed Martin and Northrop Grumman while making younger or privately held companies more attractive by comparison.
Executive compensation data suggests defense CEOs are not paid far out of line with peers in other industries. Median CEO pay across 10 of the largest publicly traded defense contractors was about $19 million in 2024, roughly comparable to similarly sized companies and modestly higher than the median for the broader S&P 500. Shareholder payouts, however, have varied widely.
Over the five years ending December 31, 2024, RTX distributed dividends and buybacks equal to roughly 250% of net income, while Lockheed Martin paid out about 121%. General Dynamics and Northrop Grumman posted lower but still significant payout ratios. Boeing, still recovering from setbacks related to its 737 Max program, paid minimal dividends and conducted no buybacks during the same period.
By comparison, the 500 highest-revenue U.S. companies paid out an average of about 87% of net income to shareholders over that timeframe. Investors now face uncertainty over how Trump’s policies will reshape capital allocation across the defense sector, even as global security concerns point to rising demand for military hardware.
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