Lutnick Hints at Taking Stakes in Defense Companies. What It Means for Northrop and Other Stocks.

A U. S. Air Force Lockheed Martin F-35A Lightning II multi-role fighter. (Simon Galloway/Getty Images)

Commerce Secretary Howard Lutnick on Tuesday opened the door to the federal government taking stakes in American defense contractors.

That will leave investors in defense stocks puzzling out the impact for days, if not months.

“There’s a monstrous discussion about defense,” said Lutnick on CNBC’s Squawk Box, answering a question about taking stakes in defense contractors. “Lockheed Martin makes 97% of their revenue from the U.S. government. They are basically an arm of the U.S. government.” He added that the secretary of defense is “thinking about it.”

Shares of Lockheed Martin gained 1.7%, closing at $455.46, while Northrop Grumman , General Dynamics , and L3Harris Technologies added 1%, 0.7%, and 0.6%, respectively. The S&P 500 and Dow Jones Industrial Average rose 0.4% and 0.3%, respectively.

Lockheed gets close to 70% of its sales from U.S. customers. It wasn’t immediately clear how the commerce secretary arrived at the 97% he cited. He might have been referring to trade deals with U.S. allies.

The Commerce Department and the Defense Department didn’t respond to requests for comment.

“As we did in his first term, we are continuing our strong working relationship with President Trump and his Administration to strengthen our national defense,” said Lockheed in an emailed statement. Other large U.S. defense contractors didn’t respond to requests for comment.

Taking a stake, free or paid, would be relatively unprecedented. The industry is neither in need of capital nor in distress.

Those are two circumstances where the U.S. government has purchased equity in companies in the past. The federal government, famously, owned part of General Motors as the company restructured during the 2008-2009 financial crisis. It exited the GM stake in 2013.

Most recently, Intel, which does need capital, agreed to grant the government a stake of about 10%. The purchase will be funded by $5.7 billion in unpaid Chips Act grants to the company and a $3.2 billion award from the Secure Enclave national security program.

“If the U.S. Government is not actually paying for a stake, then it dilutes existing shareholders,” says Vertical Research Partners analyst Rob Stallard, noting that there are no details of what a deal would look like. Money for nothing “completely contradicts the drive to get new entrants into the defense game like Palantir, SpaceX, etc.”

“Why…would the U.S. government take stakes in major contractors when [the contractors] are signaling they have excess capital and using that to buy back their stock?” asked Capital Alpha Partners’ Byron Callan.

“You could argue that Boeing could use an equity investment to pay off debt, [but] this does not seem necessary, and the Oct. 2024 $24 billion equity offering put [Boeing] on firmer ground,” wrote Jefferies analyst Sheila Kahyaoglu in a Tuesday report.

“Equity investments could create the ultimate conflict of interest. We can only imagine the first protest of an award that goes to a prime [contractor] that the government has an equity stake in over a non-government prime.”

To be sure, it is an odd idea. The government, however, might feel like it deserves to take stakes because the companies’ businesses are so closely linked to it.

Write to Al Root at allen.root@dowjones.com