Company stock
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Company stock
My employer (old, massive, international corporation) offers a stock purchasing program whereby they will gift me one share for every three shares that I purchase, up to a certain amount each month. These gifted shares are held as "phantom shares" (their terminology) until they become vested after 3 years.
Since the gifted shares are taxed as income and I'd have to pay taxes on the capital gains, is it worth it compared to putting the same amount of money in my Roth IRA? I don't own any individual stocks (all index) but the matching makes it seem almost worthwhile.
-rollingkansas
Since the gifted shares are taxed as income and I'd have to pay taxes on the capital gains, is it worth it compared to putting the same amount of money in my Roth IRA? I don't own any individual stocks (all index) but the matching makes it seem almost worthwhile.
-rollingkansas
"Drop five-zero, fire for effect."
Re: Company stock
That's quite a long vesting period by ESPP standards, but still, 33% is quite the match. By comparison, my husband's ESPP gives him 15% in shares as a bonus once he has held his purchased shares one quarter. In effect you are getting the bonus up front so you can benefit from growth (and dividends?) before the vesting period, rather than waiting for an outright bonus (which is how many other plans seem to work). If you think you'll still be there in 3 years then this could be worth it for some portion of your excess cash. However the usual advice of "max out the ESPP" may not apply in this case with such a long holding period. The stock could decline before you vest in the bonus, so effectively for 3 years you are just tilting your AA toward your employer with no added benefit.
I'd make sure you are getting your entire 401k match and maxing out a Roth IRA before putting anything additional into this plan.
I'd make sure you are getting your entire 401k match and maxing out a Roth IRA before putting anything additional into this plan.
"An investment in knowledge pays the best interest." - Benjamin Franklin
Re: Company stock
How long have you worked at your employer? How long do you expect to work there? Is there a limit to the number of shares they will gift? I'll buy some or all I can!rollingkansas wrote:My employer (old, massive, international corporation) offers a stock purchasing program whereby they will gift me one share for every three shares that I purchase, up to a certain amount each month. These gifted shares are held as "phantom shares" (their terminology) until they become vested after 3 years.
Since the gifted shares are taxed as income and I'd have to pay taxes on the capital gains, is it worth it compared to putting the same amount of money in my Roth IRA? I don't own any individual stocks (all index) but the matching makes it seem almost worthwhile.
-rollingkansas
Makes a difference that you say "old, massive, international corporation" vs. young tech startup. My assumption is that in 3 years the stock price will have gone up 10% and you'll get 1% annual dividends, so on the base investment, you're going to get 13% expected return plus the 33% matching, so I'm looking at 46% return. Alternatively, the stock can fall more than 30% and you'll still be about break even. I'd give it good odds that you'll come out ahead doing this, especially if you average it out over years.
The "phantom share" vest after 3 years, but do you have to hold the share you bought for that long? It might be possible to sell the share you bought earlier as soon as you earned the match gift shares, but before they vest. Check the dates or calendar year, and divest as soon as you can, since you'll be buying more company stock on a constant basis. You have to limit risk, and holding more than 10% may be risky. Doubly risky if the company fails and you lose your job, but given the old, massive, international designation, I'd personally go as high as 20% or more before beginning to be concerned. Others may not be so cavalier.
Now if you want, there are things you could to mitigate the risk, say by buying collars, which can be pretty low cost and you have to renew short term. What is the beta of the stock? Buying SPX puts might be a reasonable hedge. The VIX may be another hedge, but straight buying puts might be too costly doing this regularly. Is there a close competitor you could use to partially hedge?
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Re: Company stock
Can you sell the shares you bought immediately after the phantom shares are given to you? If so, you're only stuck with the tax for now, not such a bad deal. If you have to keep the shares, then no. I had a deal like that once. Bought stock at $48 a share and sold at $12 a share. It didn't work out so well.
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Re: Company stock
Ignoring dividends and taxes, a 25% fall would be break-even.inbox788 wrote:the stock can fall more than 30% and you'll still be about break even.
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Re: Company stock
Yeah, I thought about that but after reading over the fine print it states that I have to hold the shares I buy for three years to become fully vested in the phantom shares.Jack FFR1846 wrote:Can you sell the shares you bought immediately after the phantom shares are given to you? If so, you're only stuck with the tax for now, not such a bad deal. If you have to keep the shares, then no. I had a deal like that once. Bought stock at $48 a share and sold at $12 a share. It didn't work out so well.
"Drop five-zero, fire for effect."
Re: Company stock
That's too bad that you have to hold it for so long. Despite anecdotal stories about losses (i.e. Enron, Lehman, etc.), if you're committed to your company, and can handle the risk, it's a good bet. Most megacorps, most times will do about what the market will do. If you are committed to this year after year after year, you take away some of the time risk, and in fact, wind up dollar cost averaging through beneficial dips. You're doubling down on your company!rollingkansas wrote:Yeah, I thought about that but after reading over the fine print it states that I have to hold the shares I buy for three years to become fully vested in the phantom shares.Jack FFR1846 wrote:Can you sell the shares you bought immediately after the phantom shares are given to you? If so, you're only stuck with the tax for now, not such a bad deal. If you have to keep the shares, then no. I had a deal like that once. Bought stock at $48 a share and sold at $12 a share. It didn't work out so well.
Take 2% or 3% of your portfolio each year and run it through the 3 year holding period, so it will total about 5-10% of your overall portfolio. After 3 years, you can roll the 3 year old shares into new shares, and keep collecting free shares. If there's even modest growth, in 5-6 years, you'll be playing with house money.
Re: Company stock
I've participated in ESPPs similar to this, with a 24 month holding period. Bought the max, set up a tickler file and religiously sold them as they came off waivers so we didn't get too over invested in a single firm on which we relied for our livelihood.
The mightiest Oak is just a nut who stayed the course.
Re: Company stock
Well you know your company better than us. If I worked for Exxon, I would take advantage of that offer, assuming it was a smallish portion of my portfolio.
Re: Company stock
I don't know what megacorp I wouldn't take advantage of to some degree, say market cap > $50B.bberris wrote:Well you know your company better than us. If I worked for Exxon, I would take advantage of that offer, assuming it was a smallish portion of my portfolio.
The only one that comes to mind might be AMZN. It's one that would make me a little uneasy, and it's not necessarily old, so not likely OPs.
Here's a nice global 100 list. Allied Irish Banks goes from $1B in 2009 to $104B in 2014. Might be housing all the cash AAPL, MSFT, and GOOG are parking in Ireland. Might be a little toppy now, imagine if you started buying 5 years ago with 3:1 match and it goes up 100 fold!
http://www.pwc.com/gx/en/audit-services ... tion.jhtml
http://www.pwc.com/gx/en/audit-services ... update.pdf