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Secretary del Toro captures the essence of the anti-buyback argument, which has been articulated by Pentagon leaders for years: “You can’t be asking the American taxpayer to make even greater public investments while you continue, in some cases, to goose your stock prices through stock buybacks, deferring promised capital investments, and other accounting maneuvers. . . .” "Specifically, some senior DOD officials have raised concerns when companies that are doing business with the DOD use remaining capital to buy back existing shares of company stock in lieu of additional investments in research and development, or production capacity."
Why do defense companies continue to pursue stock buybacks? It is principally the large mature defense primes such as Lockheed Martin, Northrop Grumman and HII that buy back stock. These firms are profitable, generate significant cash flow, have a relatively low cost of capital and are not highly leveraged.
Is it an either or: investment for innovation and production capacity or return value to shareholders?
This opinion offers recommendations on how to change the incentive structures in the defense market.
Jerry McGinn is the executive director of the Greg and Camille Baroni Center for Government Contracting at George Mason University and a former senior U.S. Defense Department acquisition official. Mikhail Grinberg is a partner at Renaissance Strategic Advisors and a member of the center’s advisory board. Lloyd Everhart is a research manager at the center.
Stock buybacks in defense: What drives them, and how that can change? (defensenews.com)