Defense contractors would be barred from buying back their stock in bill approved by Senate panel

Senate Armed Services Committee He approved a must-pass bill that included a provision that could ban some defense contractors from making stock buybacks or paying dividends without Defense Department approval.

The measure is known as an annual bill. National Defense Authorization ActIt was approved 18-9 at a closed-door committee meeting last week. Including the stock buyback provision in the committee’s bill greatly increases its chances of becoming law and creates a potential sea change in how the Pentagon interacts with some of the nation’s largest companies.

Its bipartisan nature also highlights how Republicans under President Donald Trump are abandoning some of their free-market orthodoxies to join more interventionist Democrats. The mandate is expected to receive strong reactions from the companies it will apply to: LockheedMartin, Northrop Grumman And Boeing’s.

Committee member Sen. Elizabeth Warren, D-Mass., helped ensure the measure was included in the committee bill. The aim of this, he said in an interview, was to “bring a little discipline to defense contractors who have been running amok for years.”

“These giant defense contractors are buying back their own stock for the sole purpose of driving up stock prices and increasing the salaries of company executives,” he said. “The restriction in the NDAA says that if you’re a company that doesn’t even honor government contracts, you can’t do that.”

The provision in the bill, Section 815, prohibits the Pentagon from contracting with contractors unless the contractor agrees in writing “not to purchase the securities of such entity or any parent of such entity that is traded on a national securities exchange” or “not to pay dividends or make any other capital distribution with respect to the entity’s stock.”

This provision will enter into force on June 15, 2027. The secretary of defense may agree to waive the limitation if the contractor submits an “appropriate defense investment plan.”

Under the bill, the Pentagon would be required to launch an investigation process to find out which contractors violated the provision by buying back stock or paying dividends without a waiver. Waived contractors may also be in violation if they “underperform in terms of prioritization, investment, or production.”

Contractors in violation may be assessed a range of penalties for noncompliance, including suspension of contract payments and loss of eligibility for contracts and competitive grants.

Sen. Jack Reed, D-R.I., ranking member of the Senate Armed Services Committee, said the provision was included in the NDAA on a bipartisan basis.

“It was generally a bipartisan situation,” he told CNBC. “We set contractual requirements, and when they fail to meet them, it is wrong to turn around and buy back stock instead of reinvesting in production facilities and other aspects.”

Asked whether he thought the measure would succeed through negotiations in the House, he said he hoped the lower house would “appreciate” that “if we sign a contract, we expect it to be fulfilled.”

The measure will likely garner significant Republican support. Earlier this year, Trump signed an executive order banning defense contractors from buying back stock or paying dividends, making it even harder for Republicans to oppose it.

Sen. Rick Scott, R-Fla., who sits on the committee, offered his support in a conversation with CNBC on Tuesday.

“If you’re making money through the federal government, you shouldn’t be making a return to shareholders until we’re done,” said Scott, who was previously the CEO of a publicly traded healthcare company.

Some of the text in the NDAA was written by Warren from Sen. Josh Hawley, R-Mo. and comes from his “Defense Warfighter Prioritization Agreement Act” bill with Mike Lee, R-Utah; This law will similarly prevent buybacks and dividend payments.

Sen. Tim Sheehy, R-Mont., another member of the Armed Services Committee, responded with a thumbs-up when asked about the provision Tuesday. Sheehy’s office did not respond to a request for comment about the context of his thumbs up or how he felt about the measure.

The House of Representatives did not include the stock buyback and dividend provision in its version of the NDAA. Rep. Chris DeLuzio, D-Pa., withdrew an amendment to add it, citing procedural issues when the House Armed Services Committee approved its version of the measure, but it could be included in a later amendment or after final negotiations between the House and Senate.

Even so, there is expected to be resistance to the measure, which would mean the federal government has unusual access to private sector business practices. The Pentagon does business with tens of thousands of contractors, which means the business implications could be wide-ranging.

Major trade organizations representing defense contractors have vociferously opposed it, warning that it would give the government unprecedented access to the market.

The U.S. Chamber of Commerce wrote a letter to the House of Representatives saying it “respectfully but firmly opposes any such legislative effort.”

“Reducing stock price volatility, increasing market liquidity, reducing transaction costs, and providing greater stability for retail investors during periods of market turbulence are proven benefits of share buybacks,” the Chamber wrote in its letter. “Enacting restrictions on this practice represents a flawed and unwarranted intrusion into free market mechanisms and does not address the fundamental challenges that the Executive Order seeks to address.”

The Aerospace Industries Association also opposes the measure.

“Capital allocation tools such as dividends and buybacks are essential to attract private capital that funds innovation, manufacturing and workforce growth in the defense sector,” Eric Fanning, the group’s chairman and CEO, told CNBC. he said. “Arbitrary restrictions will make the sector less competitive for investment and reduce capital flows at a time when policymakers aim to broaden the industrial base.”

“Over time, this will shrink the market that policymakers are trying to strengthen and undermine both economic growth and national security. We urge the Senate to reconsider,” he said. Fanning is a former Army secretary.

Warren also stated that he hopes the measure will continue, but that knives will be used for this.

“This is a very popular provision, but I never kid myself, lobbyists are going out of their way to protect the defense industry,” he said. “There will never be a similar kind of lobbying force that will protect U.S. taxpayers, so we’ll see.”