Trump Demands More Defense Spending But Threatens Biggest Firms

0:00Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London with the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break.

0:37So whether it's geopolitics, energy, tech or markets, you're hearing it while it happens. It's smart, calm and to the point. And it fits into your morning. You can find new episodes of the Bloomberg Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin and Paris. On Apple, Spotify, YouTube or wherever you get your podcasts.

1:02Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. I'm not sure if the last 24, 48 hours has been a good time for the defense contractors or a bad time. On one hand, you have President Trump saying he wants to ramp up defense spending big time. On the other hand, he says we want you to do better, do faster, stop paying out dividends and buybacks. I don't know what's going on there.

1:41So George Ferguson, it's his job to know what's going on. He's a senior aerospace defense and airlines analyst for Bloomberg Intelligence. George, what 24, 48 hours has been for the defense contractors. My head is spinning. What's your take? So my take is that one and a half trillion sounds like a great deal. great defense budget. It sounds like if you're a defense contractor, it'll be hard to execute on that, right? That's basically increasing the budget by 50%. So I'm not sure how much they'll really be able to benefit from that big increase. We still got to see Congress also approve something like that too.

2:15So I don't get too excited yet about that$1.5 trillion number. A lot of things in Washington, the bear will be in the details and see what they bring forward. I'm a little more concerned about the buyback dividend limit on compensation restrictions, or at least push to limit, right? Because we're kind of looking at this overnight, thinking about this a bit, right? So these are defense stocks, right? Defense stocks are not, you don't wake up in the morning and find out some defense company has the killer, I don't know, killer app, killer device and all of a sudden everybody's got to own it. Revenues are rising by 70%.

3:02It's a huge profit maker. Profits are just ballooning out and the stocks are rising. These are sort of slow, methodical growing companies. They help the country build some of the equipment we need to defend ourselves. They get margins, 10, 11, 12. That's a good margin. And, you know, for the rest of the industry, the rest of industrials, that's not super great. And so you support your stock through dividends and share buybacks as you need them, right? And so there's a class of investor in here looking for that dividend. I think it's a fair return for them, meaning it's fair for them to look for that as a shareholder.

3:44So I think that if they can't have a dividend, they're going to have to go find some other shareholders. you know, I'm a little concerned about how they how they do that, to be honest with you, how they manage that change. How much I mean, we know that President Trump signed an executive order regarding this buybacks and dividends and capping executive pay. But in reality, I don't know what kind of, I guess, authority he really has. Now, I guess there's a tremendous amount of leverage the federal government has because they're obviously the biggest customer of these defense contractors. Have you heard anything from the companies about how they might deal with, you know, a tougher stance with the government?

4:24Not hear from the companies. Yeah, right. It's been about 12 hours, so I'm sure they're busy huddling and trying to figure out what to do next. Yeah, but I agree with you. So look, it feels like the president and obviously the Defense Department could hold back contracts as a way to try to influence the defense companies. But I don't think it's quite as easy as that, right? You're not going to pull the joint strike fighter out of Lockheed and put it somewhere else, right? You can't. It would take you a decade to do that, I think, or at least half a decade. And Trump will be out of office by then.

4:56Raytheon makes really great radars, air defense systems. That's one of their core competencies. You're not going to pull it out of there right away. And so to me, I think that sort of the contract leverage is challenging. For sure, I think they can make it a bit more painful than the executive teams would like. And one of the other things we keep thinking about, too, is so Raytheon is part of a bigger company called RTX. Two-thirds of that company is commercial. So if you're RTX management, maybe you'd want to separate, right? Because all of a sudden, you can't feed your shareholders on the commercial side the same as you could feed them on the defense side.

5:38Maybe you'd say, okay, why don't we pull Raytheon out of here? I don't think the federal government wants that either, right? Because there are synergies inside an RTX where they make jet engines for the Joint Strike Fighter. They make jet engines for the commercial aircraft fleet, the global commercial aircraft fleet. You want those synergies inside the company. So I'm not sure how this fully plays out. My guess is that right now you don't need a lot of support from a buyback perspective because defense stocks are generally hot, right? So a lot of them I've seen sort of wind down some of those buybacks.

6:10The dividend is a different story. Maybe they go in and try to discuss with the administration a bit about how they keep the dividend. And the CEOs have to worry about how to fix the$5 million cap on their pay. Stay with us. More from Bloomberg Intelligence coming up after this.

6:30You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's take a look at one of the stocks that was hard hit last year. Constellation Brands fell 36 percent in 2025. And heading into this earnings report, I think it's safe to say that expectations were not necessarily high because, you know, a whole generation of kids seem to have turned away from alcohol and turned to... Scandals. Yeah. Alternative sources of inebriation.

7:07In any case, Kenneth Shea is Bloomberg Intelligence's Senior Consumer Products Analyst, joining us now to talk about Constellation Brands. And Kenneth, Constellation Brands, the stock at least, is up 4 % today. Was it a case of expectations were really low and it beat a lowered bar? Hi, Scarlett. Yeah, that's the way I'm looking at it. Clearly, when a company lowered guidance last quarter, it was really set the bar low, and they exceeded that bar last night. You know, having said that, though, they remain cautious, and I think it's for good reason. And that's because the fundamental drivers that are pressuring the company's, you know, outlook remain in place, and the company spelled them out.

7:47Predominantly, it's the impact of the cumulative raises of prices over the last few years on beer. to some degree consumers have sticker shock when they go buy beer. Also, half the company's customer base, according to the company, are from the Hispanic community, which understandably is under pressure with the U.S. immigration policy. Those two factors are unlikely to change in the near term, and hence the company remains cautious going forward. So if the Hispanic population is important for them, how are they dealing with it? Is there any marketing they can do? Is it just that seems like almost out of their control.

8:25To some degree it is, Paul. Having said that, I mean, the company has, you know, deserves credit for doing all it can do. It's coming out with a no-alcoholic version of Corona for those seeking that. What's the point? Well, a lot of consumers, you know, another pressure, John, is that there's alcohol moderation going on. Scarlett alluded that a minute ago. So that hasn't changed. Alcohol moderation is not only, you know, the young demographic out there chooses other forms of inebriation like cannabis. But also they're more conscientious, I believe, of health risk associated with alcohol as maybe their parents and grandparents, you know, did.

9:09And then you have GLP-1 drugs. Our own survey at Bloomberg Intelligence showed that 30 % of GLP-1 users significantly reduce alcohol in their diets. So all these factors combined suggest increased caution is needed here. Increased caution. And, of course, that's something – this is a structural headwind for a company like Constellation Brands. It's not just beer either. I know beer is like the dominant part of their business. But spirits and wines, how does that look for Constellation Brands? Well, they've done a good job pruning some of the underachieving brands over the last few years. It's predominantly a wine portfolio.

9:48And consumers tend to be pretty loyal to brands and don't really deviate much towards beer and spirits. They like wine and they, you know, it's a pretty stable category. Having said that, there's been a lot of low-priced competition in recent years. And that's really hurt the margin structure of that business. So it's likely to remain somewhat under pressure by any of the same factors that I mentioned before. But it is a higher margin, you know, portfolio than it was a year or two ago. And the company has some pretty good brands in that category. I'm not sure I want to know the answer to this, Ken, but can you tell me what the US ready to drink protein market is?

10:31Sure, Paul. Well, you know, it's it's only $8 billion market as a segue to beer, which is$110 billion. It's a small market, but it's growing fast again. It's been around a while. But unlike those days where the consumers drank it as a supplemental to their diet, overall diet, now they're responding to, again, GLP-1. It's one of the beneficiaries of the GLP-1 trend. And also the dietary guidelines came out today and said, More protein is needed. This is a real easy way for a consumer to get the protein. It's inexpensive. It's in lots of different flavors. It's convenient. It's portable. And so basically, it's a high protein.

11:15A high protein drink can give you as much as half of your daily intake of protein, according to the FDA. So it's an easy way to meet or exceed your requirements for protein. Is this the kind of narrative that Constellation Brands wants to be pushing to investors to get them excited or to kind of signal that this is where they see opportunities? Constellation? Well, you know, I think the communication they're giving investors is we're doing all we can do, you know, to ride out this turbulence in alcoholic beverages. And obviously beer is 90 percent of their portfolio. video. At the end of the day, though, the company gets really high margins.

11:59It has the best margin structure of all the beverage companies I cover. They have an operating margin in the high 30s. That's really high. It's almost twice that of the average US beverage company. And as such, it generates a lot of free cash flow. And I think that explains why Berkshire Hathaway has been nibbling away and increasing its stake in this company. It's all about free cash flow with one of its big brewers down in Mexico in Veracruz almost completed. We would expect free cash flow to grow at a strong double digit rate over the next couple of years, even amid all these pressures on alcohol.

12:38And Ken, whenever we talk to you about your companies, we need to talk about a dividend and dividend policy. I see they have a dividend yield here about 2.8 percent. A, is that a competitive dividend yield? And B, maybe is you expected to go higher? In terms of competitive, it's about the same as its closest U.S. beverage peers, around, you know, two and a half to three and a half percent or so. So that's on par. Its dividend pay ratio at about 30 percent is comfortable enough that future increases we think are very achievable. And I think the company has committed to rewarding shareholders through a regular dividend increase and also periodic share buybacks, which we would expect to pick up, as I mentioned, as this free cash flow picks up over the next couple of years.

13:23Stay with us. More from Bloomberg Intelligence coming up after this.

13:30You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's switch gears to the real estate business, because that's also in the crosshairs of President Trump calling out some issues more, you know, basically saying Trump targets institutional purchases of single family homes. So we want to bring in Jeff Langbaum, who covers all the REITs for us at Bloomberg Intelligence. Jeff, what's the president targeting here, and is it really an issue in the residential real estate market?

14:09It really isn't. It's one of those things that's been a target for politicians for some time because it's a very easy political message to sell. You're going after the big institutions that are crowding out the individual homebuyers, making prices too expensive. But at the end of the day, you know, these are these are well-run institutional landlords of rental homes, not unlike, you know, apartment homes. And, you know, I think that at the end of the day, if what he is suggesting he wants to do gets done in some capacity, you know, the net result probably winds up being less home inventory, which probably ends up making offsetting any positive impact on pricing that he would be looking to accomplish.

14:57Well, the only I don't know much about this business, but are they how big is institutional ownership of residential real estate in the U.S. these days? It's it's tiny. You know, it's it's I've seen numbers. It's it's only a couple percent of the overall housing stock, maybe a little bit more of the overall rental housing stock. But at the end of the day, it's a majority of what is owned, single family homes that are rented are owned by mom and pop, small investors, rather than the large institutions. But clearly, the large institutions have the buying power. And that's what's being targeted here.

15:36What I mean, I guess in some fashion, the president and his administration are going after the high cost of housing, the afford or the lack of affordability of housing in this country. From your REIC perspective, what's going on there? How do we get ourselves here and maybe how do we fix this situation? Well, I mean, the reason that there's a housing affordability issue is because there hasn't been enough built for an extended period of time. And we were undersupplied. And the way to get out of that is to increase supply. And anything that you do from an administrative or regulatory perspective that caps incentive to build new supply is the real problem here for pricing.

16:17Right now, rentals are more affordable than buying a home. I think that's pretty well understood across the board. And there's just there's not enough incentive for builders of either single family or multifamily right now to to increase the housing supply, which really is needed to increase affordability, to improve affordability. So what do the developers, what are they arguing for? Like other specific remedies are looking for in terms of permitting, just regulatory hurdles to build? Yeah, I mean, basically, that's the key is improved ease of permitting, you know, maybe some public-private partnerships where there's some government input in tax incentives or things of that nature.

17:02obviously in markets like New York here, you know, the ability to more easily convert old office buildings into rental housing. But, you know, on the single family side, which is what this is really targeting, you know, one of the things that the builders are doing right now is selling their inventory to institutions who will own it and rent it. And that's being targeted. And if you take away that buyer, then, you know, it makes it harder for them to build if they don't necessarily feel confident they're going to be able to sell their inventory at the end of the day. Are building restrictions, they're local, right?

17:36They're not federal, are they? Correct. Yeah, the permitting process and the regulations on housing are at the local level. So, I mean, is this something, I mean, are certain states, certain areas, is it easier to build, harder to build? I would think in New York City it'd be terribly hard to build something. Yeah, I mean, you know, you can look broad geographic strokes. I mean, areas in the Sun Belt are, you know, historically much easier to build. Obviously, there's much more land, but also the regulatory environment is easier. And so that's, you know, where there's historically been significant more construction.

18:14And the demand has followed. And so it, you know, typically supply and demand work on their own. And, you know, the government stays out of it. The federal government stays out of it. And so, you know, at the end of the day, I'm not really sure exactly what's going to be able to be done here. It feels like banning specific owners of properties from playing in a private market transaction is interesting. We'll see. But clearly, he's making life difficult for these companies. Stay with us. More from Bloomberg Intelligence coming up after this.

18:51You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Well, hundreds of companies are lined up to recoup their share of the billions of dollars in duties paid so far as U.S. Supreme Court is poised to decide the fate of most of President Donald Trump's tariffs. That ruling could come as soon as tomorrow. And that is the subject of the Big Take story on the Bloomberg terminal and Bloomberg dot com slash Big Take.

19:25More than 1000 companies are suing Trump over tariffs is the title of that article. One of the reporters, Zoe Tillman, joins us here. Zoe Tillman, she's Bloomberg News senior reporter covering law and politics. Zoe, what can you tell us about these suits here by these companies? Right. So back in April, when the president announced his reciprocal tariffs, the so-called Liberation Day tariffs, A handful of small businesses and a coalition of states filed suit. And for the most part, that was it for most of the year. Much of the business world did not get involved, stayed on the sidelines. You know, talking with trade lawyers, what they told us was there was a fear of blowback for stepping out against the administration.

20:08A number of companies wanted to wait and see what happened, you know, before sticking their necks out. But as the year drew to a close, the Supreme Court heard arguments. You know, there was some sense that perhaps key members of the conservative wing were skeptical and the tariffs might fall. We are suddenly seeing a flood of businesses going into court wanting to make sure that they've done everything they can to try to get refunds if the court rules against the tariffs in the coming days or weeks. These cases are building off of those original lawsuits. They're not raising new claims. What they're saying is we agree that the tariffs are unlawful, and if they fall, we think we should get our money back.

20:49So it's really a preemptive approach that these companies are taking at this point. So more than 100 corporate entities are now involved in the legal fight, including some big household company names like Costco, Goodyear Tire and Rubber Company. What's the feeling in legal circles here about how this Supreme Court case might go and what it might mean for some of these people that would like to get some of their money back? Right. And I should say the vast majority of companies that have sued so far are small businesses that perhaps most consumers have never heard of. But we talked with owners who told us that, you know, the amounts that they're paying several thousand dollars, tens of thousands of dollars have been a huge hit to their bottom line and their ability to staff stock goods and so on.

21:35That said, the arguments on November 5th, we saw key members of the court asking very skeptical questions about the lawfulness of the president's use of this 1977 economic emergency powers law to impose the tariffs. And once that happened, there were at least some companies that said, you know, the odds seem at least good enough that we're willing to now take steps to publicly come out against this policy. It's certainly not the case for all. We talked to lawyers who said, you know, some didn't fear the blowback. They just didn't see a need to do this until recently. Some red headlines crossing the Bloomberg terminal here.

22:17Venezuela Assembly President Rodriguez on state television says that Venezuela should release important number of prisoners. That's according to Venezuela Assembly President Rodriguez. We'll have more reporting on that going forward. Zoe, is there a mechanism for, I don't know, the government, I guess, to return some of these tariffs back to companies that paid them? So there is precedent for this, just not on the scale that we would expect to see if the Supreme Court strikes down these tariffs. A number of years ago, there was a harbor maintenance tax that the Supreme Court struck down, And that resulted in roughly 4 ,000 companies going to a U.S.

23:02trade court to get refunds for the money that they had paid to the government. According to a court filing in December, looking at roughly 300 ,000 importers so far that have paid these contested tariffs on something like 30 plus million entries of goods into the United States. So there is a process that the trade court has used before to handle sort of a mass refund process. And there's been some expectation in some of the filings that we've seen that everyone expects that to be the way this unfolds if the tariffs are struck down. That said, you know, the administration could certainly say, you know, maybe there's an administrative process that we want to use that doesn't go through the courts.

23:45They haven't proposed anything like that and have mostly discussed this as if they, too, anticipate needing to go through courts. But the scale and scope of this is unlike what the trade court has had to handle in the past. So it would be, you know, the thousand companies that we've seen so far is really a tiny fraction of the importers who might be eligible to at least pursue a claim with the government. This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app.

24:27You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.