Al Root
President Donald Trump is playing Santa Claus.
On Wednesday, he announced $1,776 bonuses for military service members. It is a nice Christmas bonus and a reference to the 250th anniversary of the signing of the Declaration of Independence, in July 2026. He is also thinking about dropping a lump of coal in the stockings of defense investors.
The president is considering an executive order that would limit defense companies' ability to pay dividends or buy back stock if projects are behind schedule or over budget, according to a report from Reuters. The White House didn't immediately respond to a request for comment.
The potential order might have weighed on defense shares a little. The iShares Aerospace & Defense exchange-traded fund dropped 1.5% on Wednesday, while the S&P 500 fell 1.2%, leaving the ETF up 41% so far this year.
Jefferies analyst Sheila Kahyaoglu called the idea an overreach in a recent research report. "Contractors don't need to be regulated, given contract structure and clearer demand signals, self-regulate investments, " she wrote. "From 2023 to 2024, [defense] primes reinvested $38.9 billion in R&D/capex versus $49.6 billion deployed to buybacks and dividends."
Penalties for nonperformance are fine. They could include clawbacks or contract cancellation, but they shouldn't extend to capital-allocation decisions.
The auto industry deals with a similar issue from time to time, typically around contract negotiation with the United Auto Workers. Union leaders point out how much investors have been paid in buybacks and dividends, although those amounts are smaller than the annual amount spent on wages, capital spending, and engineering.
Dividends and buybacks, along with increasing earnings by reinvesting profits, are what make companies worth anything at all. Vilifying capital returns isn't a good idea.
For starters, dividends have accounted for roughly 40% of stock market returns for the past century and have been paid by companies for hundreds of years. They give investors a reason to hand over their capital so businesses can use it.
That system for funding businesses and generating wealth has worked. A majority of U.S. households, more than 70 million, hold stocks and bonds.
To be sure, buybacks and dividends can go awry. Within the aerospace and defense industry, it is easy to argue, as Barron's has , that prior Boeing management overemphasized capital returns, which resulted in a loss of market share to rival Airbus. That isn't the norm, though. And it is up to shareholders to manage their company's managers.
Customers, like the U.S. government in the case of defense, can make any product or pricing demand they like. But they shouldn't get a say on capital allocation.
Regulators, of course, have a role. Bank regulations can limit capital returns, but bank capital is an existential issue for the sector. Companies that make things, such as fighter jets, have different fundamentals than those that finance investment by collecting a lot of money and lending most of it out.
Recent bank regulations are probably prudent, but they do affect shareholders' behavior. Take JPMorgan Chase.
Before the 2008-2009 financial crisis brought a wave of new rules, its stock traded for roughly 12 times the earnings per share expected for the coming 12 months. They trade for 15 times now, but that isn't the whole story.
The S&P 500 traded for about 15 times earnings before the crisis, so JPMorgan stock traded for 80% of the market multiple. Now the S&P 500 trades at 22 times, and JPMorgan's valuation is less than 70% of that.
Over the years, defense stocks have traded at a small discount to the market. That gap could widen if some form of capital controls weighs on investor sentiment and earnings growth. Truist analyst Michael Ciarmoli wrote on Wednesday that eliminating buybacks could theoretically reduce 2026 growth in earnings per share by 3.2 percentage points.
Lower valuation ratios and lower capital returns, which could make it more difficult to finance defense innovations, are, admittedly, a worst-case scenario.
It's enough to say that capital controls on the sector are a bad idea.
As for the military bonuses, active-duty service members in pay grades six or less are eligible.
Write to Al Root at allen.root@dowjones.com.
To subscribe to Barron's, visit http://www.barrons.com/subscribe
(END) Dow Jones Newswires
December 19, 2025 21:30 ET (02:30 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
Comments