Jan 9 (Reuters) - Defense contractors are seeking legal advice after U.S. President Donald Trump signed an executive order to tie share buybacks, dividends and executive pay to weapons delivery schedules, three sources said.

Trump's executive order "Prioritizing the Warfighter in Defense Contracting," signed on Tuesday, may be hard to enforce but could chill major buybacks and bonuses as firms seek to avoid falling out with the administration, the sources said.

The threat of contract terminations and other penalties for underperforming companies is real, according to ‌company executives, analysts and other industry observers, but those actions could easily get tied up in court or be delayed in other ways to make them less effective.

Yet fear of the Trump administration has become a ​significant factor in corporate decision-making. One industry executive viewed the order as unenforceable and vague, but said his company would strive to comply for ‍fear of angering the administration.

Even though dividend yields for most major defense contractors remain below the norm, a ⁠second executive noted that when the debate ⁠involves executive pay and shareholder returns during a period of delayed weapons deliveries, the government has a strong public relations position.

"America's defense industrial base has a responsibility to ensure our warfighters have the best ‌possible equipment and weapons - and, with this Executive Order, the days of defense contractors ​prioritizing investor returns over military readiness are over," said White House spokeswoman Anna Kelly.

Top defense contractor Lockheed Martin said it "shares President Trump's and the Department of War's focus on speed, accountability, and results, and will continue to invest and innovate at scale." ⁠L3Harris's CEO said in a letter to employees obtained by Reuters: "Meeting this ‍moment will require increased ​investment."

Other big contractors including RTX, General Dynamics and Northrop Grumman did not immediately return a request for comment. Boeing declined to comment.

Trump's executive order sent defense stocks down immediately after Trump blasted the industry's slow production on Truth Social hours before the order was published.

Shares rebounded ‍later when Trump said his administration's fiscal year 2027 defense budget request would reach $1.5 trillion, a 50% increase from the current $1 trillion budget.

Implications of the executive order were digested by the defense industry overnight with executives calling legal counsel with questions about enforceability and court challenges, according to industry executives and attorneys.

For major defense companies, the restrictions could affect significant sums.

Lockheed Martin, Northrop Grumman, General Dynamics, L3Harris, and RTX paid out approximately $8 billion in dividends over the last 12 months, with dividend yields averaging 1.9%, and bought back roughly $10 billion in shares, according to data compiled by Morgan Stanley.

Kristine Liwag, an analyst at Morgan ​Stanley, characterized the ‍dual announcements in a note late Tuesday as "carrots and sticks," with the record defense budget increase serving as the carrot and capital return limits as the stick. 

Liwag also raised questions about enforceability, noting that the U.S. government does not own equity stakes in defense firms, ​hold golden shares with preferred rights, or have board representation at the companies.

ENFORCEMENT POWERS

Under the executive order's enforcement provisions, the Secretary of War must within 30 days identify contractors who fall afoul of the new order's rules. Those companies will receive notice and have 15 days to submit board-approved remediation plans.

The order also requires that executive incentive compensation be tied to on-time delivery and increased production rather than short-term financial metrics like earnings per share.

Industry sources said that defense contractors face an uphill battle on public perception, regardless of the executive order's legal standing. The second senior defense industry executive said: "there's just no way for the defense companies to win on the optics of this."

Franklin Turner, ​a federal contracting lawyer at McCarter & English, who represents many publicly traded companies, said the immediate battlefield will center on threatened contract terminations and related adverse actions.

"The real chilling part of this is that many contractors are going to get a nasty letter, followed by potential withholding of pay, terminations, and God knows what else," Turner said. "It's just a way that the administration is ‍trying to crack the whip on these people."