'A troubling precedent': Businesses ask Senate to kill a plan to limit stock buybacks and dividends

SAUL LOEB / AFP via Getty Images

• Donald Trump's effort to limit defense stock buybacks could be included in a key defense bill.
• Over 40 trade groups are urging the Senate to quash the push to limit buybacks and dividends.
• They argue that dividends are important for everyday investors.

Businesses are urging Congress to strip a measure from a bill that would restrict defense contractors from issuing dividends or buying back their stock.

More than 40 business and industry groups have penned a letter to the Senate urging action on section 815 of the National Defense Authorization Act, a provision that would effectively ban companies that contract with the Department of Defense from buying back their own shares or paying dividends.

"If adopted, Section 815 would harm millions of American retirees and other investors by restricting lawful returns of capital to shareholders, establish a troubling precedent for federal interference in corporate governance and capital allocation decisions," the letter stated.

President Trump first discussed the idea of barring defense contractors from stock buybacks in January. His initial statements triggered a selloff in defense stocks, hitting sector leaders like General Dynamics, Northrop Grumman and Lockheed Martin.

Months later, business groups and the Chamber of Commerce are urging Senate to ensure that Section 815 is stricken from the NDAA entirely, making it clear that they see severe consequences if it is signed into law.

Signed by a list of pro-business organizations that includes the US Chamber of Commerce, the American Bankers Association, and American Council for Capital Formation, the letter highlighted the concerning elements that these businesses and organizations see with Trump's plan.

They framed their argument around the notion the move would harm "main street investors," as Section 815 would limit two of the primary ways that a company can return money to shareholders. The letter's authors said it could be a blow retirement funds for many Americans, given how many people own stocks through their 401(k) and Roth IRA accounts.

"Stock buybacks are simply another common way of providing a financial return to investors," the letter states. "Supporters of restrictions on buybacks argue that when companies elect to buy back their own stock, they are taking capital away from research & development, manufacturing, or other investments. Such claims are demonstrably false."

Trump's January executive order was framed as a way to penalize contractors for underperforming.

"Every firm across our economy has a right to profit from prudent investment and hard work, but the American defense industrial base also has the responsibility to ensure that America's warfighters have the best possible equipment and weapons," the order said. In a Truth Social post, the president said: "MILITARY EQUIPMENT IS NOT BEING MADE FAST ENOUGH!"

Share buybacks are sometimes criticized as a way for companies to artificially boost their stock price irrespective of actual performance, but the business and trade groups that signed the letter say they're important for individual investors as well as big institutions.

Citing a study from the US Chamber of Commerce, the letter notes that retail investors have saved as much as $4.2 billion over the past 17 years as a direct result of share buybacks.

"Some of the newest investors in the market are the beneficiaries of Trump Accounts, a program that depends upon consistent returns in the stock market," the letter added. "Restrictions on the return of capital to shareholders could constrain investment returns and threaten the long-term success of this program."

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