WSJ 1/9/26
They make the most-feared weapons in the world, but these companies will struggle to put up a
fight on behalf of their shareholders.
Before delighting them by asking for a big bump in military spending, President Trump issued an
executive order Wednesday stating that defense contractors “are not permitted in any way, shape,
or form to pay dividends or buy back stock, until such time as they are able to produce a superior
product, on time and on budget.”
No industry is as exposed: Trump is the commander in chief and the federal government is
responsible for most of its revenue.
Political targeting of buybacks is nothing new, though. It’s one of the few issues that unites left
and right in America. Trump joins his predecessor Joe Biden, Secretary of State Marco Rubio,
and Senators Bernie Sanders and Elizabeth Warren in criticizing the shareholder rewards.
Their complaints may differ. The logic is equally flawed.
Americans like it when companies invest in domestic plants or R&D and hire lots of people
whom they pay fairly. But businesses that are told how to spend their money instead of putting it
to its highest and best use ultimately hurt their shareholders and the economy by investing in dud
projects. That’s especially true when politicians nudge them.
The sums involved are certainly chunky. Four large defense contractors—Lockheed Martin,
RTX, General Dynamics and L3Harris—paid out $156 billion in the past decade combined via
dividends and buybacks. That was more than three times their capital expenditures.
Their return on invested capital–what they earned on the money not paid out–has averaged a
little over 10% recently: good, but not as much as shareholders earned just redeploying
contractors’ surplus cash into an index fund the past few years.
What would the returns have been if the companies had invested four times as much? Almost
certainly lower. And what would they have invested in?
As violent as the world is, you can only sell so many missiles and tanks. Defense companies
would have had to diversify into products they didn’t understand as well. Grumman infamously
got into the bus business in the 1970s.
The fact that companies in the S&P 500 had more than $1 trillion in buybacks last year got
headlines. The overall proportion of their earnings returned to shareholders has been pretty
steady over the decades, though. Corporate profits are high and buybacks have just become a
more popular vehicle than dividends, mainly because they’re favored by long-term shareholders.
Trump’s criticisms of cost overruns and delays might be justified. Ditto for his frustration with
insurers and drugmakers . America spends far more on defense and health care than similar
countries. He and Congress can do something about that directly, though.
Sure, it’s complicated. But paying companies lavishly and then forcing them to squander their
windfalls is the worst of both worlds.
Productivity can be another name for a rough job market: A big jump in
productivity helps explain what's been going on in the US economy.
Worker productivity grew at its fastest clip in two years as businesses spent
heavily on AI and pulled back on hiring. It took less labor to pump up GDP,
generating growth without much more elbow grease or keyboard tapping from
American workers.
The Labor Department found the hourly output per worker accelerated at a 4.9%
annualized rate in the third quarter, matching levels not seen since 2023.
As Joe Brusuelas, chief economist at RSM, wrote in a note Thursday, the
average productivity gain of 4.5% over the last six months is "unmitigated good
news."
Should businesses prove they are efficiently wielding their labor and AI
investments, that would point to an increase in American living standards.
But even as the economy grew at a 4.3% rate during the same period, job gains
have been meager.
In a sense, businesses are thriving while also posting LinkedIn signs of "no more
help needed."
Stocks I’m Watching
↘️ General Motors: The carmaker said it would book a $6 billion charge on its money-losing
electric-vehicle business. Shares dropped 1.4% in offhours trading.
�� Johnson & Johnson: The company became the latest drugmaker to agree to lower U.S.
medicine prices. The agreement exempts J&J's pharmaceutical products from the Trump
administration's tariffs.
↗️ Glencore: The company is back in talks with Rio Tinto about a potential merger that
could create the world’s largest miner. Glencore shares jumped 8% in London, while Rio Tinto
shares dropped around 2%.
↘️ LG Electronics: The South Korean consumer-electronics company expects its
first quarterly operating loss in nine years. Shares dropped 3.4% in Seoul.
↘️ Fast Retailing: The Japanese owner of the Uniqlo clothes chain reported strong quarterly
earnings and raised its annual profit guidance. Shares jumped nearly 11% to a record close,
boosting the Nikkei 225.