Are U.S. defense contractors lavishing their investors too much?

0:01NPR.

0:11In early January, President Donald Trump signed an executive order threatening bans on defense contractors paying dividends or buying their stock back. This is yet another tightening of the grip on markets that we've seen under President Trump. Yeah, like the US government's now investing in rare earth minerals companies. It's taken a quote-unquote golden share in US steel. Quite a change from the last few decades. So to explain this executive order, dividends are the classic way that companies send a slice of profits to investors. And stock buybacks do a similar thing, but through a different mechanism.

0:45The company itself purchases shares of its own company. That means that whoever still holds on to the remaining shares is now holding on to a higher percentage of the company. So it raises the value of them. Trump basically wants to restrict defense companies from rewarding their shareholders at the expense of investing in new factories. Is this normal? No, no, not at all for private companies. That's why I think there's a question. Are we nationalizing the defense industry? Stacey Pettyjohn is a director at the Center for a New American Security, a defense think tank. And that question is fascinating.

1:20Is the government starting to take over decisions that have traditionally been made by the private sector? This is The Indicator from Planet Money. I'm Darian Woods. And I'm Stephen Massaha. Today on the show, possible bans on defense dividends and stock buybacks. We learn why the White House is so frustrated and talk to a defense investor about how they're reacting. In the American War toolkit, the Tomahawk missile is like a Ford F-150 pickup truck. It's a weapon that's popular, not necessarily the flashiest, but it gets the job done. The Tomahawk destroys targets far away, and the US military can't get enough of them.

2:02In recent years, the industry has been making around 50 or 60 annually. But in just one recent deployment alone, the US used 125. That was against the Houthis in the Middle East. The main manufacturer of Tomahawk missiles is the private contractor Raytheon. And despite investing in new factories, it still takes years to build new Tomahawk missiles. Raytheon has blamed related missile delays on supply chain issues. President Trump is not convinced. In early January, he wrote on True Social, Raytheon has been the least responsive to the needs of the Department of War, the slowest in increasing their volume, and the most aggressive spending on their shareholders rather than the needs and demands of the United States military.

2:48We asked Raytheon for comment through repeated emails and a registered letter, but did not receive a response before publishing. The spat over Raytheon reflects broader frustrations that President Trump and Defense Secretary Pete Hegseth have at the moment. They believe contractors aren't producing weapons fast enough. Here's Hegseth talking about those companies late last year at the National War College. Schedule overruns, huge order backlogs, and two predictable cost increases become the norm. He's definitely grumpy. To learn more about what Hegseth's talking about, we spoke to Stacey Pettyjohn from that defense think tank.

3:24They want things to be produced faster. And I think there's general agreement that right now the U.S. industry is not moving fast enough. Stacey believes that much of the problem starts with the Pentagon. A lot of it is due to the customer, the U.S. Department of Defense, that has led us to this place where we have a pretty thin industry in many areas. There aren't a lot of companies competing. Stacey says one reason for this is that contracts can be for a really long period. And so that has locked the government into perhaps a single supplier for potentially decades without competition. The second piece is consistency.

4:08So the U.S. government is a terrible customer. They will buy, like, say, Tomahawk missiles. One year, the Navy will buy 100 or 200. They're pretty expensive. They're over a million dollars each. And then the next year, they'll buy zero. So if you are a company that has a production line that is set up to produce 100 Tomahawks a year, and your only buyer sometimes wants 100, sometimes wants zero, sometimes wants 20, it's really hard to make enough investments in the production capacity to be at the high end all the time because your production lines are just actually being unused and those are incurring losses.

4:49Now, allies like the UK also buy some tomahawks, but the U.S. is the big buyer. Now, to the administration's credit, it recognizes these two problems with government purchasing, that long contracts have been this winner-takes-all situation that stifles competition, and also that government demand has been lumpy, very up and down. And it's doing things to address it, like awarding contracts for one company to design a new fighter plane, for example, but then have multiple companies awarded contracts to actually do the production. And Congress has recently approved multi-year weapon contracts so that contractors can have more certainty each year.

5:26So those are some tweaks to contracts. Another way to get more weapons made faster is just more money to motivate those companies. Donald Trump is advocating for a massive 50 % increase to the defense budget. Clearly, the administration isn't satisfied with all these measures. Trump's executive order says part of the problem is too much money going to invest stores and not enough into investment. Between the 2000s and the 2010s, military contractors lavished just over 70 % more on their shareholders as a share of revenue. But spending on things like factories and machines went down. So you can imagine Hegseth and Trump looking at this and saying, hey, you're not spending enough on making tomahawks and too much on shareholders.

6:13But Shannon Sokosha begs to differ. Shannon is the chief investment officer for Newburgh Berman, an asset manager that invests in the defense sector, including Raytheon. Are they paying some sort of outsized amount in dividends or outsized amount in buybacks and therefore not reinvesting into their business? And that's not really the story. Shannon says if you take the S &P 500 index of large U.S. companies, the average company there spends a similar amount in stock buybacks. In other words, a similar amount rewarding shareholders by buying up its own shares. Dividends are higher for defense stocks, but she doesn't think it's materially different.

6:51She says that if the Trump administration were to follow through on its threat and really clamp down on defense dividends and buybacks, this could backfire. The unintended consequence would be that shareholders would lose interest in potentially buying the shares of these companies. And that would create additional challenges for them in being able to reinvest capital. And so it's a bit of a self-fulfilling cycle. Overall, though, Shannon sees a lot of pros and cons for investors in the current defense environment. Remember, this executive order was paired by a call to drastically increase defense spending.

7:32Shannon says what will really matter is what happens next. The government does have broad powers through the Defense Production Act, but any enforcement of a ban would likely get tied up in legal proceedings. To these points, defense and aerospace stocks dipped a little on the day of the announcement, but then rocketed up further the next week. That said, the executive order does raise questions about whether the Trump administration is turning to more state control over defense production. We're probably looking at, you know, some much more prescriptive approach in terms of how this would be implemented if it were to be implemented.

8:11This idea of government meddling troubles Stacey Pettyjohn, the defense policy director. Overall, she supports the approach we have now, a collaborative relationship between the government and business. She says it's led to a lot of innovations, like, say, ongoing improvements to the Tomahawk missile. Stacey thinks this executive order risks undermining that model. This seems to be sort of a confused action and potentially one that could have a lot of unintended repercussions that hurt the U.S. military and reduce U.S. military capability in the long run. We asked the White House whether it considered the executive order could discourage investment.

8:53White House Deputy Press Secretary Anna Kelly put the onus back on the defense industry, saying it was the industry's responsibility to ensure U.S. warfighters have the best possible equipment and weapons. She said the days of defense contractors prioritizing investor returns over military readiness are over. This episode was produced by Corey Bridges with engineering by Maggie Luthor, who was fact-checked by Sierra Juarez. Cake and Cannon edits the show and The Indicator is a production of NPR.