Company Stock Purchase

[rdy4er]

My company offers a stock purchase program at a 15% discount off the retail price. It is not something I would normally invest in (airline stock) but is this a "no brainer". By the way, the stock is up 94% in the last 12 months.
What do you think?

 

[Texas Proud]

It matters if you already have a good amount of company stock in a 401(k) or stock options....

The program I was in did not allow you to sell stock out of the plan... if you did, you were shut down from buying any more for a year...

I got around that by asking for a stock certificate, depositing it in a brokerage account and then selling the shares...



So, if you are not heavy into your company or can get around selling the shares and you can live with the stock volatility then you should go for it...

 

[RunningBum]

I hadn't heard of one where you couldn't sell shares, unless you are an insider (high level employee), and even then there are windows, but I guess it doesn't surprise me that they may exist. Assuming no restrictions, it is a no brainer. Most people advise to either sell as soon as you get them to get the 15% (or more) gain, or sell after the minimum holding period to get LT capital gains on the profits if it does go up. I foolishly hung onto them and watch the shares go sky high, and then tumble down. I still did better than breaking even but would've done better to dump them as I went. The 15% is still going to be regular income (not cap gains) if it's set up how most of those plans are.

 

[ArkTinkerer]

There are tax issues of selling the discounted shares in less than a year--it is taxed as regular income.

 

[RunningBum]

There are tax issues of selling the discounted shares in less than a year--it is taxed as regular income.

Not really an issue, is it? It's a free 15% (or more) profit, less the taxes. As long as your tax rate is less than 100% you still come out ahead. Usually they give a 15% discount and buy the shares at the lower of the stock price at the beginning or end of the purchase period, which is usually 6 months or a year. No risk whatsoever, you just tie up some money from your paycheck for that purchase period. The 15% is always going to be taxed as regular income so the benefit to holding it longer is only to get long term treatment on the gains after the discount. You're probably better off diversifying into another investment of your choice and holding that long enough for LTCGs. Now, when it goes up 94% it may be worth holding it for another year to get LTCGs on that gain, but you risk it falling during that time too.

 

[athena53]

So much decides on what % of your assets are company stock already. I bought company stock at a similar discount and came out OK, but it wouldn't have killed my plans for retirement if they'd taken a nosedive because I had plenty of other assets.


What does the investment community say about the stock? That would be a big factor for me in deciding how much to invest. Your time horizon is also important- if it goes down, can you wait it out till the stock recovers?

 

[LoneAspen]

I dropped out of my company's ESPP plan because the cash flow each month was more important to me than the ROI.

My company allows us to contribute 15% of our gross salary towards the ESPP, which also had a 15% discount on the day of purchase. The 15% contribution is calculated pre-tax, but taken out of post-tax (net) salary, which was a significant hit each month.

I ran the numbers on what our stock is trading for, and the amount of profit, and it came out to such a low amount of profit (after taxes) that to me, it just wasn't worth it. I'd rather have my 15% of net each month than wait for such a low return every six months.

If you're in a position where the cash flow each month isn't going to be missed, then I'd say go for it. But for me, I'd rather have the cash each month. YMMV.

 

[rdy4er]

Thanks everyone for your thoughts, I just started with this company so I do not have any other shares. The first year pay is so low that buying 10% of my earnings is not a big number. It is bought with after tax money.

 

[Texas Proud]

Not really an issue, is it? It's a free 15% (or more) profit, less the taxes. As long as your tax rate is less than 100% you still come out ahead. Usually they give a 15% discount and buy the shares at the lower of the stock price at the beginning or end of the purchase period, which is usually 6 months or a year. No risk whatsoever, you just tie up some money from your paycheck for that purchase period. The 15% is always going to be taxed as regular income so the benefit to holding it longer is only to get long term treatment on the gains after the discount. You're probably better off diversifying into another investment of your choice and holding that long enough for LTCGs. Now, when it goes up 94% it may be worth holding it for another year to get LTCGs on that gain, but you risk it falling during that time too.

They might have changed it since I left 7 years ago..... but the plan I was in would take money from your paycheck and invest it the same day... they did not save it and buy once or twice a year...

They did have a restriction on selling.... they did not want to give you a discount and you buy and sell... it was designed to encourage stock ownership in the company, not to make a 15% profit and cash out... you could sell the shares at any time.... but if you did then you could not buy again for a year.... but, IIRC, mine was either a 5% or 10% discount... I wish it was 15%....

 

[Big_Hitter]

My company offers a stock purchase program at a 15% discount off the retail price. It is not something I would normally invest in (airline stock) but is this a "no brainer". By the way, the stock is up 94% in the last 12 months.
What do you think?

do you get the discount at the lower of the boy or eoy values? we also got 5% interest on the "deferrals"

that's how my old 423 plan used to work - made a ton of money on it - I always sold it right after I bought it


I believe the 15% of pay has some dollar cap (or used to) fwiw

 

[rdy4er]

do you get the discount at the lower of the boy or eoy values? we also got 5% interest on the "deferrals"

that's how my old 423 plan used to work - made a ton of money on it - I always sold it right after I bought it


I believe the 15% of pay has some dollar cap (or used to) fwiw

You can contribute up to 10% of your gross pay, they collect it for 6 months and then buy the stock at that current price minus 15%.

 

[Big_Hitter]

if you can immediately sell it that's a no brainer

 

[clifp]

You can contribute up to 10% of your gross pay, they collect it for 6 months and then buy the stock at that current price minus 15%.

Yup it is a no brainer. I'll steal from post I made yesterday Mr Mustache.

Actually in most cases you are better of borrowing money on a credit card and maxing out participating in an ESPP..

Here is an example. Lets say the stock is selling for $23.52 which after your 15% discount means you can purchase it for $20 share.
The stock is purchased every 6 months. (Some plan like the one I was in gave you a 15% discount at the lower of the price at the beginning of the 6 months period or at the end.) But lets assume your just operates at the end of the pay period.


Every pay period you contribute $200 month at the end of 6 months you contributed $1,200 which means you have enough to buy 60 shares you sell the shares at $23.52/share leaving you $1411 or $211 in profit.

Now lets assume you don't have an extra $200 month so you have to borrow on a credit card at 18% interest or 1.5% per month. The first $200 will cost $3/month for 5 months (there is a month grace period) the 2nd month you borrow another $200 for 4 month, 3rd month 3months etc. Your total interest is cost is $15+$12+9$+$6+$3 (ignoring the tiny amount of interest on interest) or a total of $45 to make $211 in profit. You'll have to pay taxes on the $211 of say 30% but even after taxes and interest you'll still be ahead by about $100. Plus you can do this twice a year. Which mean you can make $200 on a maximum investment of $1200 which is a phenomenal rate of over 16%. Plus in most plans its practically guaranteed.

There are only two investment which are worth going into credit car debt for employee match on a 401K and 90% of ESPP.

If you aren't borrowing money the IRR works out to be something 132% a year (number is from failing memory, but I remember having 7 engineer spend an entire lunch hour calculators in hand, figuring this out.) Plus since in many cases the price is a 15% discount on the lower of the starting or ending price it is even more of a no brainer.

Personally I generally held on to the stock for the remaining 18 month to take advantage of the capital gains but that's a different discussion.

 

[ERD50]

Yup it is a no brainer. ... Plus since in many cases the price is a 15% discount on the lower of the starting or ending price it is even more of a no brainer. ...

At my MegaCorp, it also was a 15% discount from the lowest start/end in the 6 month period, and no restriction on selling it. I went full in, and decided to sell immediately (didn't want to take the risk of holding a year for the LT vs ST tax benefit).

I kept trying to explain to others what a smokin' hot deal this was - the same approach, it was worth borrowing on a credit card if you had to. It drove me nuts that people would hem and haw and not do it. I was seriously thinking of trying to pay them the money up front to do it if they didn't want to, as we could only put in 10% of salary (IIRC).

And sometimes the stock would rise quite a bit in that 6 months, and you'd get 15% below the low, and sell a few days later at the higher price. Volatility was your friend.

The 132% number sounds familiar as well. The 15% discount means you buy a $100 share stock for $85, sell for $100, so a 17.65% gain - 2x a year is 35.29%, but you are paying with each paycheck along the 6 month period, so on average you had only half your money committed. I think that doubles it again, to over 70%. So I guess I don't recall how that almost doubled again to 132%, so maybe that wasn't it. But it was a LOT!

Yep, just shook my head that people would turn this down. One guy, said he discussed it with his father, who worked in some sort of investment career, told him he already had enough exposure to company stock risk/job. I said - but you sell it! You hold it for three days while the trade settles! There is almost no risk! Buy a put, sell some short for those three days if you have to, but do it!

Nope, wouldn't do it.

-ERD50

 

[Texas Proud]

I would have loved to be able to get a 15% discount and sell right away!!!!

As others have said, a no brainer..... and also a max of what you could invest...

 

[ERD50]

I would have loved to be able to get a 15% discount and sell right away!!!!

As others have said, a no brainer..... and also a max of what you could invest...

Yes, and now I'm reminded of another 'excuse' I heard at the time. Some people actually said getting the lowest of the start/end period was not so great, because if it dipped lower in-between, you could have bought it lower.

Ummm, but this is guaranteed. And how do you know that's the low, until the end of the period?

And these were not stupid people, but they just seemed blind to these very simple numbers. You really could not get any more of a no-brainer than this, yet people with full craniums let it pass them by.

I said the company was just doing this as an employee benefit (and probably hoping people would hold, but it wasn't required) - it would be like turning down medical coverage and paying out of pocket for covered expenses- why would you do that?

-ERD50

 

[clifp]

And sometimes the stock would rise quite a bit in that 6 months, and you'd get 15% below the low, and sell a few days later at the higher price. Volatility was your friend.

The 132% number sounds familiar as well. The 15% discount means you buy a $100 share stock for $85, sell for $100, so a 17.65% gain - 2x a year is 35.29%, but you are paying with each paycheck along the 6 month period, so on average you had only half your money committed. I think that doubles it again, to over 70%. So I guess I don't recall how that almost doubled again to 132%, so maybe that wasn't it. But it was a LOT!

Yep, just shook my head that people would turn this down. One guy, said he discussed it with his father, who worked in some sort of investment career, told him he already had enough exposure to company stock risk/job. I said - but you sell it! You hold it for three days while the trade settles! There is almost no risk! Buy a put, sell some short for those three days if you have to, but do it!

Nope, wouldn't do it.

-ERD50

I ran into that same attitude occasionally. For the new engineers a couple senior guys would grab a white board and explain it to them. They'd relent.

The real challenge was admins. I eventually offered to loan my admin the money interest free, she did l 5% the first time and decided that it was great (the stock went up luckily) and then maxxed out contributions.

Fundamentally, it is just really hard for paycheck to paycheck people to make good financial decision that require any type of long term sacrifice.

The interesting thing was this woman was really sharp, she got a great scholarship (for single moms or something), to study computer science at Stanford of all places.

Once again she was reluctant to give up her salary today. I was incredulous, you are getting free tuition at Stanford to study one of the most lucrative majors, you'll more than double your salary in 4 years, and you are not sure..

 

[athena53]

A previous employer had an EPP (not sure what the acronym was) which allowed you to commit to buying company stock during the upcoming 2 years at a priced fixed in October of the previous year. If the stock went down you still got your money back with some money-market level of interest. It was a "Phantom stock" plan- not sure how the bookkeeping or cash flow worked. After 2 years it was liquidated and you got the profits- sadly, taxed as 100% ordinary income. No choice on when you liquidated. If you left the company voluntarily in the 2 years all your got was money market interest.


In late 2008 the stock was at an abysmal price of $12/share. Many of us signed up for 2009-2010. I almost didn't and now that seems crazy, but a coworker pointed out you pretty much couldn't lose. The stock recovered to $60/share but was at $50 when we liquidated. The additional taxes we owed were nasty despite the withholding that had been taken out, but we did well. Another actuary in the company said she knew 3 people who didn't participate. She paid off her mortgage with her proceeds.


We had quite a few resignations after the proceeds were distributed! They tell me the EPP plan is no longer offered.

 

[Animorph]

Fundamentally, it is just really hard for paycheck to paycheck people to make good financial decision that require any type of long term sacrifice.

+1, and the tax instructions were a pain to follow as well. I had to create a spreadsheet to reconcile W-2's and pay stubs to make sure the ESPP normal income gains were included. We had a few times when they weren't. And if you decide to hang on to the shares it gets even stranger.

And you may have to actually place a sell order to get your money out, perhaps several days after the shares were actually priced because the administrator was slow getting them into your account.

DW is now retired, so I won't have to deal with that this year. One big plus for retirement!