In a bold move blending economic interventionism with national security priorities, President Donald Trump issued an executive order on January 7, 2026, titled "Prioritizing the Warfighter in Defense Contracting," which immediately prohibits U.S. defense contractors from engaging in share buybacks or paying dividends if they fail to invest in modernizing production facilities and accelerating weapons output.
The directive, effective upon signing, targets companies deemed underperforming by the Secretary of War (formerly Defense), aiming to redirect corporate funds from shareholder returns to bolstering America's military capabilities.
Trump's rationale, articulated in a Truth Social post, criticizes defense giants for prioritizing "massive Dividends to their Shareholders and massive Stock Buybacks" over investments in plants and equipment. He emphasized that such practices will no longer be tolerated until contractors deliver "superior products, on time and on budget." Specifically calling out RTX (formerly Raytheon), Trump warned that failure to invest in new factories could result in lost Pentagon contracts.
Key Provisions of the Order
The executive order mandates that within 30 days, the Secretary of War evaluate contractors' efficiency based on contract fulfillment, investments in production capacity, and timely delivery. For those falling short, the Department can demand remedial actions or invoke enforcement under the Defense Production Act (DPA) of 1950 — a Korean War-era law granting the president broad powers to direct industrial production for national security.
The DPA, historically used for priorities like ventilator production during COVID-19, now extends to curbing financial practices deemed detrimental to defense readiness.
Future contracts must include clauses barring buybacks and dividends during periods of "insufficient performance," while tying executive compensation to delivery metrics rather than shareholder-focused financials. Trump has suggested capping CEO pay at $5 million annually for underperformers, a proposal echoed by Defense Secretary Pete Hegseth.
The "Dream Army" Vision and Budget Surge
Complementing the order, Trump proposed inflating the FY 2027 defense budget to $1.5 trillion — a 66% hike from the $901 billion allocated for FY 2026. He envisions this funding creating a "Dream Military" to ensure U.S. safety in "troubled and dangerous times."
The increase, potentially financed through tariff revenues, has garnered support from congressional armed services committee chairs, who see it as essential for rebuilding military strength. However, budget experts question its feasibility, noting it could add trillions to the national debt and exceeds any peacetime surge since the Korean War.
Market Backlash and Industry Response
The announcements triggered immediate market turbulence. Shares of major contractors like Lockheed Martin, Northrop Grumman, and RTX dropped 3-5% in the days following, as investors fretted over curtailed returns and federal overreach into corporate governance.
Analysts at Morgan Stanley described the restrictions as a "stick" but noted the budget proposal as a compensating "carrot" that could outweigh short-term pains.
In response, primes like RTX and General Dynamics have pledged to boost capital expenditures by 38% to $10.1 billion in 2026, with some halting buybacks to align with White House demands. Industry leaders argue that dividends and buybacks, totaling $18 billion recently, are in line with S&P 500 norms and essential for attracting talent and capital.
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Free Market Nuances and Broader Implications
This "military dirigisme" — state-directed economic policy — challenges free market principles, potentially deterring investment in an industry already facing talent shortages. Critics warn of legal challenges, citing overreach under the DPA, while supporters view it as vital for deterring adversaries like China. As Trump ramps up enforcement, the order could reshape defense contracting, prioritizing warfighter needs over Wall Street gains—but at what cost to innovation and efficiency?
