Employee Stock Purchase Program Strategies

**gekkoplus** · 07-10-2009, 07:34 AM

If you realistically think that your company stock can go down 15% in 2 days, then it is just too volatile to be worth a substantial investment.

You have to hold the stock for 2 years for your gains to be taxed as long-term gains. I personally have never held ESPP stocks for more than 6 months because I needed that money for something else. BTW 15% of income is a very high limit your company allows to be invested in ESPP. In my case, max limit is just 6% of paycheck.

**EEinNJ** · 07-10-2009, 08:45 AM

If your plan is to have so much of your income witheld to buy one stock at a price you can't pick, only to sell it in the short term, this is not a good plan.

If you work for a good company, you can do very well buying a smaller amount of stock regularly. My father worked for Exxon for many years and was very successful with this, as was I working for J&J. In fact, in my portfolio they are the 2 best performers, far outstripping index funds. My brother was not so lucky working for Lucent, but he got out before it really crashed.

Again, if it's a good stock, one you would buy even if you didn't work there or there was no discount, buy it a little at a time, reinvest the dividends, and hold on- not 2 years, not 5- think 10+.

**zetta** · 07-10-2009, 12:48 PM

I believe that if you sell within one year, the 15% discount is taxed as income. Any profit above the non-discount price is taxed as short term capital gains. (So if the public stock price on the purchase date is $100, but ESPP participants get it for $85, and when you sell a few days later it is $105, you would pay income tax on $15, and short term capital gains on $5.)

Another thing to watch out for is that if your company's finances become shaky, they can institute blackout periods where you are not allowed to sell your shares at all for many months at a time. This happened at a company I was at, and I discontinued ESPP contributions as a result. Some of my coworkers were stuck with shares as they watched the values go down and down.

It depends on how big this 15% ESPP contribution will be compared to your overall investing portfolio. We have a substantial portfolio, so feel comfortable "playing" the ESPP stock a little bit to pick up the 15% discount. DH usually sells within a year, and sometimes as soon as the stock lands in his account.

**buildmybudget** · 07-12-2009, 05:57 PM

Check your company's financials to see how they are doing financially and strategically. Once you're confident it's a solid investment, it should be a no brainer because of the immediate 15% return you are going to capture. However, if you're not confident it's a good investment, go with something else.

**am_vanquish** · 07-13-2009, 09:11 AM

Originally posted by zetta View Post

I believe that if you sell within one year, the 15% discount is taxed as income. Any profit above the non-discount price is taxed as short term capital gains. (So if the public stock price on the purchase date is $100, but ESPP participants get it for $85, and when you sell a few days later it is $105, you would pay income tax on $15, and short term capital gains on $5.)

Another thing to watch out for is that if your company's finances become shaky, they can institute blackout periods where you are not allowed to sell your shares at all for many months at a time. This happened at a company I was at, and I discontinued ESPP contributions as a result. Some of my coworkers were stuck with shares as they watched the values go down and down.

It depends on how big this 15% ESPP contribution will be compared to your overall investing portfolio. We have a substantial portfolio, so feel comfortable "playing" the ESPP stock a little bit to pick up the 15% discount. DH usually sells within a year, and sometimes as soon as the stock lands in his account.

The 15% contribution will quickly become a very significant portion of our overall portfolio. We are currently contributing 6% to 401k and using about 10% to max out IRA. In order to max out ESPP, we would have to reduce the IRA to 5% (with the agreement that when we do cash out ESPP, we would use it to catch up on the missed IRA contributions). If we started in September with 15% to ESPP (no withdrawals), 6% to 401k, and 5% to IRA, then in one year we would have about 35% of our overall portfolio in one stock.

I did not know that the realized gain from the 15% discount was taxed as income rather than capital gains. This will make me feel much more comfortable about selling within the 1-year time period. We're on the verge of the 15%/25% tax bracket right now, so the income tax wouldn't hurt too bad compared to capital gains. Therefore, I wouldn't feel too bad about selling within the 1-year time period to lower that 35% of overall portfolio. I guess the only remaining concern would be a blackout period, but the stock has performed quite well over the past 24 months (considering the conditions).

Do you guys think that keeping about 15%-20% of overall portfolio in company stock is too much? We just started saving/investing last year after graduating, so our portfolio isn't that large.

**zetta** · 07-13-2009, 01:27 PM

I did not know that the realized gain from the 15% discount was taxed as income rather than capital gains.

Check me on this, but my impression is that if you hold it for 2 years it will be taxed only as capital gains. Note that capital gains taxes are usually a smaller percent than income tax.

Do you guys think that keeping about 15%-20% of overall portfolio in company stock is too much? We just started saving/investing last year after graduating, so our portfolio isn't that large.

I think it's too much to keep in one stock over the long term, but if you plan to sell within a few days of acquiring the stock it's ok. If you plan to hold it for a few months to try and time the high point of the stock, be aware that you are taking on more risk.

**am_vanquish** · 02-19-2010, 09:57 AM

Sorry if this post is a bit long, but I'm trying to give as much detail as possible in hopes of getting the best advide. If you want the "core", jump to the bottom & see the 3 strategies I've developed.
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I decided to max out the ESPP from 10/1/09-12/31/09 - 15% of salary for a 15% discount. Here's a summary of what's happened so far:

10/1/09-12/31/09 Contributions: $2062.50
1/1/2010 Purchase Price (after 15% discount): $32.76 (Approx. 63 Shares)
Price at 1/15/2010 (when I received shares): $37.56
Sold 30 shares on 1/21/10 @ $38.25 w/ $20 commission
Received $5 in dividends on 2/5/2010 (reinvested)

So now I'm holding 33 shares @ $40.50. I found an analyst report that took 12-month price projections from 14 analysts and the average 12-month price projection is $44. I'm also still contributing 15%, so I'll have another ~$2k purchased at 4/1, 7/1, 10/1, etc.

My largest concern is that I don't want to have too much of my portfolio in 1 stock. Our company's financials are strong (as evidenced by the analyst projections), but we're also in the insurance/reinsurance industry. I could see a catastrophic event (e.g., huge natural disaster, fraud on the Enron level) having an instant negative impact on the company's stock.

To be safe, I could just sell the shares I've got now, then immediately trade in the shares every quarter going forward. Because the 15% discount is applied to the lower of the price at the beginning of period or end of period, the only real potential for loss here is if the stock plummets during the 2 weeks it takes for them to get the shares into my account. However, I don't want to miss out on what could be a really nice profit if we really do make it to $44-$45.

In conclusion, I'm struggling to balance my greed with a reasonable strategy. Here are the 3 strategies I've got so far:
(1) Reduce contribution rate to match what the amount I really want to hold long-term. This eliminates the "drama" of the ESPP and makes it just another stock (Buy & Hold w/ research). I estimate new contribution rate would be approx. 5%.
(2) Keep contribution rate maxed out at 15%, but sell some/all of the stock immediately every quarter. Ideally, I would get back to where strategy (1) would be at the end of every quarter. This is what I was trying to do with the sale of 30 shares on 1/21/10.
(3) Take a long put position to "insure" against huge drops. The strike, duration, and quanity of the option would be chosen in an attempt to replicate long-term holding targets. This strategy could also be combined with (1) or (2) above. I consider myself to have an above-average understanding of the theory/concepts of options (spent years learning how to price exotic options for actuarial exams), but have virtually no understanding of the transaction costs (margins, commissions, etc.)

I'm open to other strategies, but that's what I've come up with. Just wanted to bounce these ideas off of someone.

(P.S. This question is what inspired the "Trusted Advisor" thread)

**jIM_Ohio** · 02-19-2010, 10:50 AM

I missed this post first time around

here are some strategies and comments

1) if your company is a good buy, then the volatility of WHEN the purchase happens is a non event. For example some companies I really like (like Berkshire, Proctor and Gamble, Oracle) it would not matter what time of quarter I bought them. If you have confidence choice is good, then take the frequency of the purchase off the table as an issue to even discuss.

2) Retirement is 16% and appears "on track" with limited info provided. If you feel retirement is not on track, then cut the ESPP and put more into 401k or Roth's.

3) Buy only what you can afford to lose-

My largest concern is that I don't want to have too much of my portfolio in 1 stock. Our company's financials are strong (as evidenced by the analyst projections), but we're also in the insurance/reinsurance industry. I could see a catastrophic event (e.g., huge natural disaster, fraud on the Enron level) having an instant negative impact on the company's stock.

I laughed at above because isn't that the same for Berkshire, Oracle or P&G?

I would create a total allocation where you have

X% large cap
Y% small cap
Z% foreign stocks
A% bonds
B% cash

regardless of company stock
because stock sounds like a large cap, I would then do

x-10% for large caps
and
A+5% for bonds
B+5 for for cash

meaning take a little out of large cap stocks because the ESPP is giving you one anyway, and keep more cash on hand to smooth out portfolio volatility. Then build in some rebalancing parameters- every 2 years sell company stock back to basis and raise more cash (at these points you will own more cash and bonds) then at select times move that money back into market (any 30% drop in market is a buy).

Employee Stock Purchase Program Strategies