WASHINGTON — Despite admonitions from the Navy’s top official earlier this year, defense companies continue to repurchase shares at a high rate, fueling concerns about their commitment to invest in the supply chain and workforce development over shareholder returns.
In the first quarter of 2024, five of the largest defense prime contractors — General Dynamics, L3Harris, Lockheed Martin, Northrop Grumman, and RTX, which all reported earnings last week — bought back a total of $4.1 billion in shares, with some repurchasing at least $1 billion each. This followed an especially pronounced period of buybacks in the quarter ending December 2023, notable for an accelerated repurchase by RTX.
While share buybacks can boost stock value and are common in various industries, Navy Secretary Carlos Del Toro voiced his criticism of the practice within the defense sector. He underscored that firms are recording record profits while the industrial base faces challenges, urging that they should not be simultaneously asking for taxpayer investments while boosting stock prices through buybacks and other financial strategies. Del Toro’s stern message to the industry was delivered at the AFCEA West conference in San Diego, where he pointedly told attendees that “you can’t be asking for the American taxpayer to make greater public investments while you continue to goose your stock prices through stock buybacks.”
He argued that these actions prioritize executive compensation over the needed investments in the industrial base, especially at a time when national security demands heightened readiness. He stressed the importance of delivering ships, aircraft, and submarines on time and on budget, as well as innovation. Moreover, Del Toro emphasized the critical need to develop the shipbuilding industrial base, highlighting China’s far outpacing shipbuilding capacity — a result of long-term investment and strategic decisions.
Del Toro’s remarks resonate with previous expressions of concern, such as those by former Air Force Secretary Frank Kendall. However, despite such criticisms, defense companies appear to be undeterred in their pursuit of shareholder returns. Analysts suggest that unless the Defense Department undertakes more concrete actions, firms are unlikely to change course, driven by market incentives and the quest for the best return on investment.
Defense companies’ focus on share buybacks comes amid a complex backdrop of rising geopolitical tensions and increased military spending. With the U.S. Congress and the Biden administration earmarking $842 billion for military expenditure in the upcoming year — a substantial increase over prior allocations — the industry is at a crossroads between government expectations and market pressures.
This tension is further complicated by the ongoing conflicts globally, such as the war between Israel and Hamas, influencing sector dynamics and potentially catalyzing further equipment purchases. Investors, gauging the performance of the defense sector through proxies like the iShares U.S. Aerospace & Defense ETF (ITA), are watching closely as the industry navigates the dichotomy of profit-maximization and fulfilling its role in national defense infrastructure.
Relevant articles:
– Defense companies keep up momentum on share repurchases, despite Navy leader’s criticism, Breaking Defense
– Navy secretary blasts defense industry’s stock buybacks, Defense One
– Top Defense Stocks for Q4 2023, Investopedia