Defense companies continue to buy back shares despite criticism from the Navy chief

Naval Warfare, Pentagon

PASCAGOULA, Miss. (January 26, 2022) – Secretary of the Navy Carlos Del Toro participates in a media interview during a shipyard tour at Ingalls Shipbuilding in Pascagoula, Miss., January 26, 2022. Del Toro is in Mississippi and Alabama to visit shipbuilding facilities, learn more about their capabilities and discuss ways the civilian industry can help strengthen the Navy’s maritime dominance. (U.S. Navy photo by Mass Communications Specialist 2nd Class T. Logan Keown/Released)

WASHINGTON — Defense companies showed no signs of a slowdown in stock buybacks in the first quarter of 2024, despite a warning from the Navy’s top official earlier this year that companies should prioritize supply chain and workforce over shareholder returns.

In fact, research firm Capital Alpha Partners found that buyback amounts among defense contractors this financial quarter were higher for all but four others since March 2011, with the quarter ending December 2023 being the largest period due to accelerated buybacks by RTX. analyst Byron Callan wrote in a note to investors earlier this week.

It remains to be seen whether an ongoing trend of stock buybacks – a practice in which companies buy back shares to increase the value of shares – will further inflame the ire of Defense Department leaders, some of whom say they undermine the ability of companies to make internal investments. in research and development or in the supply chain.

So far, defense companies don’t seem concerned. Five of the largest defense companies – General Dynamics, L3Harris, Lockheed Martin, Northrop Grumman and RTX, all of which reported profits last week – repurchased $4.1 billion worth of stock in the first three months of the year, along with General Dynamics, Northrop and Lockheed According to Callan, they are each buying back at least $1 billion. (Boeing, which reported free cash flow of $3.9 billion this quarter as it dealt with the safety crisis in its commercial aircraft unit, did not repurchase any shares.)

Other companies are following the big primes. For example, Leidos announced share buybacks worth $183 million, more than four times the level of buybacks the company announced in the same period last year, while HII repurchased $62 million worth of shares, up from $9 million. And it’s not a practice exclusive to the largest companies: Howmet, a supplier of engine parts and aircraft structures, has repurchased $150 million worth of stock, up from $25 million in the first quarter of 2023.

General Dynamics CEO Phebe Novakovic hinted that GD could be even more optimistic about share buybacks as 2024 progresses, as a possible government shutdown early this year forced the company to trade more conservatively.

“Cash performance for the remainder of the year will be very strong and we will act accordingly,” she said during a May 24 earnings call.

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Northrop also increased its planned share buybacks for 2024, which are now expected to exceed $2 billion, Chief Financial Officer David Keffer said in a May 26 earnings call.

Share buybacks came under renewed fire from Navy Secretary Carlos Del Toro, who noted during a speech in February that some publicly traded defense companies are posting record profits even as the industrial base as a whole struggles with labor and financing problems, and as leaders industry officials say they will only invest to increase production if they have government contracts in hand.

“While I am very happy for you, you cannot ask the American taxpayer to make greater public investments while in some cases continuing to pump up stock prices through share buybacks, delaying promised capital investments and other accounting maneuvers .” he said.

Del Toro added that the practice “seems to prioritize stock prices that drive executive compensation, rather than making the necessary, fundamental investments in the industrial base and your own companies, at a time when our nation needs all of us has to lead the way.”

In response to questions from Breaking Defense about whether del Toro’s office was taking steps to discourage stock buybacks, the Navy shared no details but echoed the secretary’s concerns about the practice.

“As Secretary Del Toro has said, the Department of the Navy believes the best path forward is together with our industry partners,” a Navy spokesperson said. “However, the industry cannot rely on – and repeatedly request – the federal government to make substantial investments in industrial base capacity and workforce development while turning around and sending money back to shareholders through stock buybacks and dividends. ”

Will the industry change course?

While del Toro’s comments have not yet unleashed a broader wave of condemnation among Defense Department leaders over the issue, his criticism is similar to previous criticism leveled by officials in recent years, including Air Force Secretary Frank Kendall in 2015 during his tenure as Pentagon takeover. managerial.

And yet defense companies don’t appear to be listening — and some analysts say they probably won’t unless the Defense Department takes further action.

“It’s just the market (and) the way the market incentives are set up. For large prime companies, they believe the best return on investment is through stock buybacks,” said Jerry McGinn, executive director of George Mason University’s Center for Government Contracting. “They have to give money back to the shareholders, and that is the best investment for that.”

McGinn added that the Defense Department should instead focus on encouraging the behaviors it wants to see from the industry, such as creating opportunities that would lead to more internal corporate investment in breakthrough technologies or rewarding good performance with higher profit margins. These measures could help reduce share buybacks, he said.

Loren Thompson, a veteran aerospace and defense analyst, said that if the Defense Department continues its criticism of share buybacks, “the defense industry will scale back because it only has the one customer.”

However, that pressure “should be continuous,” he added. “It should be a drum beat.”