European defense companies are projected to return nearly $5 billion to shareholders this year, driven by a significant increase in military spending following the war in Ukraine. This return is primarily manifested in higher dividends as analyzed by Vertical Research Partners for the Financial Times. The analysis, which focuses on the largest defense firms excluding Airbus due to its commercial operations, indicates that shareholder payouts are expected to reach a decade high.
Despite these high returns, investment in the European defense sector has also surged since Russia’s invasion of Ukraine, with companies ramping up production. In contrast, the six largest U.S. defense firms—Lockheed Martin, General Dynamics, Northrop Grumman, RTX Corporation, L3Harris Technologies, and Huntington Ingalls—reported a decrease in shareholder returns following a peak in 2023, along with a slight decline in investment correspondingly.
Criticism of the defense sector has emerged, particularly in the U.S., where concerns have been raised about whether companies are appropriately reinvesting profits in production as opposed to prioritizing shareholder buybacks. Former President Donald Trump is scheduled to meet with defense contractors to discuss these issues. U.S. Treasury Secretary Scott Bessent previously highlighted concerns regarding delays in defense deliveries, suggesting a need to adjust company priorities.
Rob Stallard, an analyst at Vertical Research, stated that claims of underinvestment or “profiteering” in the U.S. defense industry lack substantial evidence. He emphasized that buybacks and dividends as a percentage of market capitalization have nearly halved in the past two years. Vertical’s findings predict that European defense firms’ investments, expressed as a percentage of revenues, could rise to 7.9% by 2025, up from 6.4% in 2021.
Key points:
- Why this story matters: The military spending surge impacts both shareholder returns and future investment in defense technology.
- Key takeaway: European defense companies are increasing payouts to shareholders while also boosting investment in production.
- Opposing viewpoint: Critics argue that companies may prioritize shareholder buybacks over necessary investments in production capabilities.
