Pentagon poised to curb some defense contractors' payouts under Trump order

Adds Pentagon comment in paragraphs 5 and 6

By Mike Stone

WASHINGTON, Feb 6 (Reuters) - Defense contractors are bracing for the Pentagon to release, as soon as Friday, a list of companies who would be subject to potential restrictions on stock buybacks and dividend payments, nearly a month after President Donald Trump signed an executive order linking shareholder payouts to weapons delivery schedules.

The list, which industry executives say has been shrouded in secrecy, will identify contractors the Pentagon deems to be underperforming on contracts while distributing profits to shareholders, according to three people familiar with the matter.

Questions remain about whether subcontractors will be named and how broadly the Pentagon will define "defense contractor". The term could potentially sweep in commercial companies with limited Pentagon work.

Trump's Jan. 7 executive order, titled "Prioritizing the Warfighter in Defense Contracting," gave Defense Secretary Pete Hegseth 30 days to identify contractors who are "underperforming on their contracts, not investing their own capital into necessary production capacity, not sufficiently prioritizing United States Government contracts, or whose production speed is insufficient."

"Defense contractors have been notified and made aware that today marks the start of an extended review period in which we will make noncompliance determinations," Chief Pentagon Spokesman Sean Parnell said in a statement. "We are engaged in detailed negotiations with many companies and going into great depth to analyze their performance."

He said many companies have taken steps to comply, and there will be a continuous evaluation of their activity. "If progress doesn’t continue to be made, we will take enforcement actions. The Department of War will partner with those who perform – and hold accountable those who do not."

Late on Friday two of the executives expected the list would be released early next week - Friday was viewed as the beginning of the period it would be released.

The order prohibits defense contractors from conducting buybacks or issuing dividends "until such time as they are able to produce a superior product, on time and on budget."

Companies named will have 15 days to submit board-approved remediation plans addressing production delays, insufficient capital investment, or inadequate prioritization of U.S. government contracts. If the Pentagon deems those plans insufficient, it can pursue enforcement actions including contract terminations. It is not clear how it would be enforced.

Defense contractors have been seeking legal advice on the restrictions, which could affect billions of dollars in shareholder payouts, Reuters previously reported. For the five largest defense firms - Lockheed Martin LMT.N, Northrop Grumman NOC.N, General Dynamics GD.N, L3Harris LHX.N, and RTX RTX.N - the stakes are high: they paid out approximately $8 billion in dividends over the last 12 months and bought back roughly $10 billion in shares, according to Morgan Stanley data.

The executive order also directs the Securities and Exchange Commission to consider barring affected contractors from regulatory safe harbors for stock repurchases. And it requires future Pentagon contracts to link executive compensation to on-time delivery rather than financial metrics like earnings per share.

Trump has criticized the defense industry for what he says are high costs and slow production. In a Truth Social post when he announced the order, Trump singled out RTX's Raytheon unit as having "been the least responsive to the needs of the Department of War."

The White House did not immediately respond to requests for comment.

(Reporting by Mike Stone in Washington; Editing by Chizu Nomiyama)

((mike.stone@thomsonreuters.com;))