ESPP Worth It?

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FreemanB
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ESPP Worth It?

Post by FreemanB » Mon Apr 13, 2015 7:45 am

I hadn't been participating in my employer's lackluster ESPP, but a recent change in it has prompted me to take a second look. It still isn't great, and I'm leaning towards continuing to invest elsewhere, but I wanted to get some other opinions. The details of the ESPP are:
  • Contributions are withheld from pay on a monthly basis.
  • Stock is purchases every three months.
  • Purchases receive a 5% discount.
  • No holding period.(This is the point that just recently changed from a six month holding requirement)
  • $25 fee for selling shares.
From when I did some rough calculations based on the share price and the discount, it seems like the $25 fee would negate a large chunk of the 5% discount if I were to sell the shares after every purchase. Taking taxes out of the sale would further reduce the benefit down to the point where I'm really only getting the equivalent of 2.1% return, assuming no share price fluctuations in the time between buying and selling. However, holding it longer to reduce the fees increases the risk of price fluctuations rendering the discount pointless. Without a significant benefit, I'll take the same funds I'd use here and just invest them in my taxable accounts.(All available tax-advantaged accounts are already being maxed out) I don't have any immediate or designated need for the money, so if I invest in taxable, it will hopefully sit for years at least. I'm not adept enough at analysis to determine the impact of the money sitting for 1-2 months(Purchased at the end of the 3rd month) before each purchase, earning no interest.

The numbers I used for my analysis are below, with numbers rounded/estimated for ease of math:

Funds for purchase every three months: $1200
Share price: $30 - 5% = $28.50
Shares purchased = 42.1
Sale proceeds = $1263 - $25 = $1238
Pre-tax return = $38
Post-tax return = $38 * 66.5% = $25.27
Return percentage = $25.27 / $1200 = 2.1%
Impact of quarterly purchases vs monthly = ???

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Rob5TCP
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Re: ESPP Worth It?

Post by Rob5TCP » Mon Apr 13, 2015 7:49 am

This is hardly an enticing offer -- only points I would consider it:
1. I was going to buy this stock anyway (though contrary to Bogelhead philosophy) and here I am getting 5% off
or
2. NOT buying into this would have some negative connotation at work (not loyal to company, not in the spirit, etc.)

5% is not worth the hassle; maybe if there was a 20% match or something of significance.

yosef
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Re: ESPP Worth It?

Post by yosef » Mon Apr 13, 2015 7:52 am

This is a pretty bad deal as far as ESPPs go. Unless there is a substantial "look back" period and your company is growing like gangbusters I'd probably skip it.

Edit: I missed that this is every 3 months, which makes it a bit better I guess. If you can sell the shares immediately go for it.
Last edited by yosef on Mon Apr 13, 2015 8:18 am, edited 1 time in total.

Spewin
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Re: ESPP Worth It?

Post by Spewin » Mon Apr 13, 2015 7:57 am

You are contributing for three months, so on average, you money is tied up only 1.5 months. A 2.1% return over 1.5 month (or 1/8 of a year) is a (1+.021)^8-1=.1809 or an 18.1% annual return. If you sell immediately, this is a guaranteed return. I'd max it out and sell immediately!

Correction: Putting in 400/month for three months and getting $1225 out after the third month is an 8.6% annual return. As pointed out below.
Last edited by Spewin on Mon Apr 13, 2015 9:57 am, edited 2 times in total.

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DaftInvestor
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Re: ESPP Worth It?

Post by DaftInvestor » Mon Apr 13, 2015 7:58 am

20% a year guaranteed return (5% every 3 months) - I'd take it. I don't think you mentioned it - but is the 5% off the lowest price over the period? That would make it even more worthwhile.

Jack FFR1846
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Re: ESPP Worth It?

Post by Jack FFR1846 » Mon Apr 13, 2015 8:00 am

You have left out some key information:

Do you get the lower price of the first/last day of the buy period? This is common and if you do, you enjoy any gains on top of the 5%

How much of your salary can you contribute? If it's a silly low value like 3%, then fees might eat gains. If it's 10% or more, go for the absolute maximum you can.

Can you log a sell order ahead of the buy so that shares buy, then immediately sell? I have had this set up and it worked to remove all risk and lock in gains.
Bogle: Smart Beta is stupid

ryman554
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Re: ESPP Worth It?

Post by ryman554 » Mon Apr 13, 2015 8:02 am

FreemanB wrote:
Funds for purchase every three months: $1200
Share price: $30 - 5% = $28.50
Shares purchased = 42.1
Sale proceeds = $1263 - $25 = $1238
Pre-tax return = $38
Post-tax return = $38 * 66.5% = $25.27
Return percentage = $25.27 / $1200 = 2.1%
Impact of quarterly purchases vs monthly = ???
1. Can you contribute more than the $1200 every 3 months? That seems fairly low. -> 4800 / year means that if you were contributing max of 10% then you would be grossing $48k a year. Remember, you only suffer the "pain" of contributions in terms of cash flow once, as the previous ESPP monies can be used to fund the current ESPP.
2. It's 2.1% per three months. That's the equivalent (roughly) of a 8.6% yearly return if you keep re-investing. Guaranteed. As a floor. Why wouldn't you be doing this? It's better than a checking account. Likely a better return than what you're getting out of your current funds.

FreemanB
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Re: ESPP Worth It?

Post by FreemanB » Mon Apr 13, 2015 8:21 am

Just to clarify, it is 5% on the day of purchase, with no look-back provision. I could comfortably contribute around $1200 ever 3 months right now. I could increase that(As said, it would only be a 3-month hit to cash flow), but I'd probably also have to sell my wife on the plan first.(She keeps the household budget, so a large change in how income was handled require some adjustments) To do that, I'd need some fairly convincing numbers first, and my own numbers were not looking shiny enough to entice her.

Goal33
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Re: ESPP Worth It?

Post by Goal33 » Mon Apr 13, 2015 8:31 am

I would put the max allowed and sell immediately. Why not? It's free money.
A man with one watch always knows what time it is; a man with two watches is never sure.

BlckJck
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Re: ESPP Worth It?

Post by BlckJck » Mon Apr 13, 2015 2:06 pm

DaftInvestor wrote:20% a year guaranteed return (5% every 3 months) - I'd take it. I don't think you mentioned it - but is the 5% off the lowest price over the period? That would make it even more worthwhile.
its still a 5% return. doesn't matter that it is happening 4 times.

most importantly, it IS extra income and if you do not need the cash right away, i'd do it. Slight discount to own a stock you hopefully believe in or sell it right away for extra $.

Also, my ESPP is the lesser of the 1st day of the QTR and the last day of the QTR. So it can potentially be more than the 5% you quote.

nukewerker
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Re: ESPP Worth It?

Post by nukewerker » Mon Apr 13, 2015 2:37 pm

I max mine out but I get a 15% discount, bought every 3 months. Max is 8% of salary which is what I am doing. Doesn't hurt I believe the stock is undervalued on a fundamentals basis (P/E of 9-10)

mmmodem
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Re: ESPP Worth It?

Post by mmmodem » Mon Apr 13, 2015 3:26 pm

At 15% I always maxed mine out. Last year, ESPP got downgraded to 5%. I decided to continue to max it out following advice on this board. I didn't pay close attention one time and didn't sell right after purchase. The stock was volatile enough to dip 4%. I had to wait some 3 months before the stock came back. This money had already been set aside years ago to be recycled through ESPP every 6 months so I wasn't too worried. After taxes last year, my gain was $360. Not worth the risk. Is $101 a year worth the risk for you?

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tfb
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Re: ESPP Worth It?

Post by tfb » Mon Apr 13, 2015 6:09 pm

FreemanB wrote:The numbers I used for my analysis are below, with numbers rounded/estimated for ease of math:

Funds for purchase every three months: $1200
Share price: $30 - 5% = $28.50
Shares purchased = 42.1
Sale proceeds = $1263 - $25 = $1238
Pre-tax return = $38
Post-tax return = $38 * 66.5% = $25.27
Return percentage = $25.27 / $1200 = 2.1%
Impact of quarterly purchases vs monthly = ???
Bank account and mutual fund returns are before tax. Therefore you should compare the pre-tax return. Assuming bi-monthly payroll, this is equivalent to a bank account paying 30% APY. As ryman554 suggested, if you contribute $2,400 every three months, your return will become equivalent to a bank account paying 42% APY. Crank up to the max!
Harry Sit, taking a break from the forums.

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g$$
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Re: ESPP Worth It?

Post by g$$ » Mon Apr 13, 2015 6:24 pm

That is 5% per quarter. Someone already mentioned this but on an annual basis it should be something more like 20% (or more?).

Compare that to the annual rate you get in your checking/savings account. Likely below 1%.

This is a good deal. Maybe not quite as good as other ESPPs, but still good.

Max it out.

-g$$

campy2010
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Re: ESPP Worth It?

Post by campy2010 » Mon Apr 13, 2015 7:17 pm

I would and do jump through some hoops for extra money - credit card bonuses, opening bank accounts, etc. But investing in a single stock for a $100 upside just isn't worth the trouble. A tiny bit of volatility in the stock price and you have a loss instead of a $100 gain. You benefit from having no holding period but it takes a few days for the shares to settle and that is enough time for a 5% fluctuation in share price.

That said, my judgement on this topic is clouded because I spent part of my weekend doing taxes complicated by an old ESPP plan from which I saw almost no benefit. I definitely did not achieve the annualized gains projected by running the numbers because the projections don't account for the swings in the stock price.

FreemanB
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Re: ESPP Worth It?

Post by FreemanB » Tue Apr 14, 2015 7:22 am

Thanks for the replies. After reading through them, I'm probably going to talk it over with my wife and decide after that how to proceed. There's no rush, since the next quarterly enrollment period still has over two months to go before I could start making contributions. As she's the one that deals with our taxes and budgets for the most part, she'll also need to buy off on any plans, particularly since if I use the ESPP, I'll probably go all in with the maximum amounts allowed.

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DaftInvestor
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Re: ESPP Worth It?

Post by DaftInvestor » Tue Apr 14, 2015 7:38 am

BlckJck wrote:
DaftInvestor wrote:20% a year guaranteed return (5% every 3 months) - I'd take it. I don't think you mentioned it - but is the 5% off the lowest price over the period? That would make it even more worthwhile.
its still a 5% return. doesn't matter that it is happening 4 times.

most importantly, it IS extra income and if you do not need the cash right away, i'd do it. Slight discount to own a stock you hopefully believe in or sell it right away for extra $.

Also, my ESPP is the lesser of the 1st day of the QTR and the last day of the QTR. So it can potentially be more than the 5% you quote.
BlckJck - my statement had the phrase "a year" in it. 5% in three months is annualized as a 20% return - this is the number that should be used when comparing to other investments. I'm not counting in fees, inflation, taxes, etc. - but these have to be accounted for in every other investment. You can't beat 20% annualized guaranteed return on your money. In fact - it is actually quite a bit higher than this as the OP likely contributes per paycheck (e.g. the first contribution is made at the beginning on the 3 months - but you make 5% on contributions all the way up to the one you make in the paycheck right before the buy - so you the company is holding the full amount for a full 3 months).

OP - I'd do whatever you can to max out....

ryman554
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Re: ESPP Worth It?

Post by ryman554 » Tue Apr 14, 2015 1:42 pm

[quote="DaftInvestor"
BlckJck - my statement had the phrase "a year" in it. 5% in three months is annualized as a 20% return - this is the number that should be used when comparing to other investments. I'm not counting in fees, inflation, taxes, etc. - but these have to be accounted for in every other investment. You can't beat 20% annualized guaranteed return on your money. In fact - it is actually quite a bit higher than this as the OP likely contributes per paycheck (e.g. the first contribution is made at the beginning on the 3 months - but you make 5% on contributions all the way up to the one you make in the paycheck right before the buy - so you the company is holding the full amount for a full 3 months).

OP - I'd do whatever you can to max out....[/quote]

Don't want to be picky, but the annualized return for 5% in 1/4 a year is not 5%*4, it's 5%^4 due to the magic of compunding. That's 21.5%..... =)

Yes, it's not what is actualy happening since you can't compound an ESPP, but would be the effective APR for this return.

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