Should we participate in ESPP?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
SunThruMist
Posts: 7
Joined: Mon Feb 06, 2017 5:33 pm

Should we participate in ESPP?

Post by SunThruMist » Mon Feb 06, 2017 9:06 pm

I'm a long-time lurker, but first-time poster - thanks for making this forum and wiki so incredibly valuable!

My spouse and I work for the same large corporation, and this is the first year we have the option to participate in the Employee Stock Purchase Plan (ESPP). The plan seems a little unusual in the details, so I'm looking for advice on whether we should participate.

The ESPP offering price was announced last week. It's a fixed number, but for a frame of reference it is ~15% off today's stock price. Enrollment in the ESPP started today through next week. During enrollment, we subscribe to purchase a certain number of shares and are obligated to complete this purchase during the offering period (i.e. no withdrawal option). The offering period is limited to March to July due to a pending merger, and, for the same reason, we can only purchase by lump sum payment (no payroll deduction option). We can buy up to 10% of our income. Purchases can be made on the 1st or 15th of the month. To assign a cost basis, the Fair Market Value (FMV) of the purchased share is set as the closing price of the stock on the day purchased. Resulting taxes are automatically withheld from our paycheck. Shares deposit into the brokerage account 7-9 days after purchase, at which point we can (would) immediately sell to reinvest in our taxable account (which would require a broker-to-broker transfer). There is no brokerage account fee or transfer fee. The commission for shares sold is a $24.95 minimum (!!!) online or $0.05/share via calling the benefits center. $5.35 for postage & handling (?? seriously ??). ESPP is run through Merrill Lynch.

My response to all this is ugh, gambling, I hate gambling. However, would we be stupid not to participate? We would not hold the stock, even at a loss. We can cash flow the maximum without affecting retirement or our EF. We max 401k, backdoor Roth IRAs, and HSAs. We also have a taxable account. So... it's just gambling on share price with the added known-wrinkle of a pending, very large merger while angsting about when exactly to buy.

What do you think?


----------------------
Our financial picture, although I'm not sure it matters for this question:

Emergency funds: one year of expenses
Debt: Mortgage - $129000 @ 2.75%, 15 yr (just refinanced)
Tax Filing Status: Married Filing Jointly
Tax Rate: 28% Federal, 4.25% State
State of Residence: MI
Age: 32/33
Desired Asset allocation: ~80% stocks / 20% bonds
Desired International allocation: ~20-30% of stocks
Portfolio size: low-to-mid six-figures (we got a later start due to extended education :P )


Current retirement assets:

Taxable at Vanguard
7% Vanguard Total Stock Market Admiral Shares (VTSAX) (ER 0.05)

Her 401k at Fidelity
40% BTC Lifepath Index 2040 O (ER 0.08)
(5% match on first 7% contribution)

His 401k at Fidelity
29% BTC Lifepath Index 2040 O (ER 0.08)
(5% match on first 7% contribution)

Her Roth IRA at Vanguard
7% Vanguard Target Retirement 2050 Fund (VFIFX) (ER 0.16)

His Roth IRA at Vanguard
10% Vanguard Target Retirement 2050 Fund (VFIFX) (ER 0.16)

Her HSA at Fidelity
3% not currently invested, in transfer

His HSA at Fidelity
4% not currently invested, in transfer


New Annual Contributions:
$18k to 401k (+match ~$5k) x 2
$5500 to Roth IRA x 2
$3400 to HSA x 2
Planned, but not set-in-stone: $20k to taxable

anoop
Posts: 463
Joined: Tue Mar 04, 2014 1:33 am

Re: Should we participate in ESPP?

Post by anoop » Mon Feb 06, 2017 9:41 pm

The way you have described it, it sounds like the offering price is 15% off today's price and stays that way even if the FMV is below that on the day of purchase. If that is the case, then I would not participate.

If instead I am guaranteed at least 15% off the FMW, then I would participate and take the free money.

When I had access to an ESPP, as soon as I got the shares, I would put in a sell order for the FMV (the value off of which taxes are computed) or above.

User35
Posts: 1
Joined: Mon Mar 10, 2014 3:15 pm

Re: Should we participate in ESPP?

Post by User35 » Mon Feb 06, 2017 9:47 pm

It's usually a discount on the lesser of the FMV Start Date or FMV Purchase Date, which I assume this is as well if it's a big company. Yes, you should do this and you should max it. I'm going to use round #'s below, but it's directionally correct.

Let's assume it's worst case and a 10% return. It's a 6 month investment, so you are getting closer to a guaranteed 20% annual return. Even better, you don't pay up front, you pay weekly spread over six months, closer to a 40% annualized return. You won't find a better guaranteed return investment.

Hopefully a better boglehead corrects my math, but this is close.

inbox788
Posts: 4194
Joined: Thu Mar 15, 2012 5:24 pm

Re: Should we participate in ESPP?

Post by inbox788 » Mon Feb 06, 2017 10:05 pm

It's not clear to me the frequency or minimum holding period. You also have the added risk of double the stakes by having both of you participate. Still, with a 15% below market price, it's worth considering. If the next period, the stock price has fallen 20%, is there a new purchase price reset? Can you withdraw from the plan or are you committed for a year? And this merger business, is the company being acquired or acquiring another company? Are the terms/prices announced already?

What is the market cap? I'd be more weary if this was a small cap, but a mid cap or large cap would probably go ahead.

What is the volatility? (high/low/recent)
http://www.fintools.com/resources/onlin ... ilitycalc/

SunThruMist
Posts: 7
Joined: Mon Feb 06, 2017 5:33 pm

Re: Should we participate in ESPP?

Post by SunThruMist » Mon Feb 06, 2017 10:41 pm

Thanks for taking the time to respond!

Anoop - yes, you are correct that we could end up buying shares on a day when the FMV is less than the ESPP price. Hence why this ESPP does not seem very attractive to me. But likewise, we could buy when the discount is more favorable than 15%. In any case, many employees like it because they are dividend investors and the stock is attractive for that sort of investing.

inbox788 - This year we will only have the ESPP from March-July. No holding period, just the processing time (I suppose) of 7-9 days. We are extremely aware of having all our employment eggs in one basket after surviving a buy-out last year. Hence having an extra-large EF. Once we enroll, we cannot withdraw from the purchase, but we can choose when to make the purchase within the offering period (although it has to be on the 1st or 15th). Regarding the merger, it's all announced and is a "merger of equals" (hah hah), but I get the feeling our company is "more equal" than the other. The merger was initially supposed to be finalized by now, but has been delayed due to regulatory resistance in Europe. We work for a large cap company. If we went through with this, I would plan to purchase and sell ASAP to stay out of the merger vortex. Dicey dicey, but 15% is respectable. If only it was set to the days FMV like most ESPPs, then this would be easy and not a gambling question. :annoyed

SunThruMist
Posts: 7
Joined: Mon Feb 06, 2017 5:33 pm

Re: Should we participate in ESPP?

Post by SunThruMist » Mon Feb 06, 2017 10:59 pm

Woops, forgot to answer your question about volatility. I have zero experience looking at individual stocks. Over what time period should I consider? Volatility has been bumping around ~15 since August of last year per your link. What are the units on volatility? Looking over the last 3 years, there are periods when it got up to ~34. Current stock price is $60 or so if that helps. You can probably figure out what company we work for at this point, heh.

anoop
Posts: 463
Joined: Tue Mar 04, 2014 1:33 am

Re: Should we participate in ESPP?

Post by anoop » Mon Feb 06, 2017 11:23 pm

SunThruMist wrote:Anoop - yes, you are correct that we could end up buying shares on a day when the FMV is less than the ESPP price. Hence why this ESPP does not seem very attractive to me. But likewise, we could buy when the discount is more favorable than 15%. In any case, many employees like it because they are dividend investors and the stock is attractive for that sort of investing.


I am very risk averse, so I don't think I would participate. And that decision would have nothing to do with net worth.

To use a quote by Zvi Bodie, I hate losing much more than I enjoy winning.

inbox788
Posts: 4194
Joined: Thu Mar 15, 2012 5:24 pm

Re: Should we participate in ESPP?

Post by inbox788 » Tue Feb 07, 2017 12:49 am

SunThruMist wrote:This year we will only have the ESPP from March-July. No holding period, just the processing time (I suppose) of 7-9 days. We are extremely aware of having all our employment eggs in one basket after surviving a buy-out last year. Hence having an extra-large EF. Once we enroll, we cannot withdraw from the purchase, but we can choose when to make the purchase within the offering period (although it has to be on the 1st or 15th). Regarding the merger, it's all announced and is a "merger of equals" (hah hah), but I get the feeling our company is "more equal" than the other. The merger was initially supposed to be finalized by now, but has been delayed due to regulatory resistance in Europe. We work for a large cap company. If we went through with this, I would plan to purchase and sell ASAP to stay out of the merger vortex. Dicey dicey, but 15% is respectable. If only it was set to the days FMV like most ESPPs, then this would be easy and not a gambling question. :annoyed

A 15% potential return for less than 10 days holding on a large cap stock is worth the risk IMO, but it's your money at risk. Has the stock moved more than 15% since the announcement of the merger? For large cap stocks, that's probably on the high side. And the merger price and odds are already priced in, so you are getting FMV (and a 15% discount off that) as far as I'm concerned. Helps if you have multiple shots at the offer to average the ups and downs, so if you could play 10 rounds, you'd expect to be ahead just about 15%. You can do better or worse, but if a lot of employees jump on board doing the same thing, you could all cause the price to tank 7-9 days after each offering. Take a look at the average number of shares traded each day and compare to the number of shares employees might be selling on a given day. If it's less than 10% don't worry too much, but a high percentage and you might impact the market, but I doubt it.
SunThruMist wrote:Woops, forgot to answer your question about volatility. I have zero experience looking at individual stocks. Over what time period should I consider? Volatility has been bumping around ~15 since August of last year per your link. What are the units on volatility? Looking over the last 3 years, there are periods when it got up to ~34. Current stock price is $60 or so if that helps. You can probably figure out what company we work for at this point, heh.

I have a suspicion, but volatility doesn't give it away. Compare it to companies like IBM around 20, so less volatile. Amazon/Netflix are around 30 which is more volatile. It's another sign that it's not likely to move that much (though 34 peak could potentially return any given moment and that's always the risk). Can you attribute specific risk to that high volatility period? Was it market related where the market was low or was it industry/company specific? (i.e. low oil prices impacting oil producers/refineries).

dcabler
Posts: 312
Joined: Wed Feb 19, 2014 11:30 am

Re: Should we participate in ESPP?

Post by dcabler » Tue Feb 07, 2017 7:36 am

It's been a while since I worked at a company that offered ESPP. But in every case, I participated.
Company A
Stock price set at the lower of the beginning of a quarter and end of the quarter: then discounted 15%

Company B
Stock price set at the lower of the beginning of a 6 month period and the end of a 6 month period: then discounted 15%. When the next 6 month period rolls around, if the set price is higher than the previous 6 month period, then the previous 6 month period's price is used. So if your company's stock is really moving upwards, you get a double bonus. This could continue indefinitely.

I used ESPP as the front end to any savings I put in my taxable accounts because I sold all stock purchased immediately after the 3 or 6 month period was over. The only risk was how much the stock moved between the closing day of the period when the price was set and the following day when I could sell it. Hard to say no to almost free money. :D

centrifuge41
Posts: 1155
Joined: Mon May 17, 2010 9:04 am

Re: Should we participate in ESPP?

Post by centrifuge41 » Tue Feb 07, 2017 9:51 am

15% discount is equal to 17.65% gain. All for 9 trading days of hold. Over 10% of your income, that's a 1.765% raise.

17.65% in 9 trading days (minus some fees). Vs a typical investment that gives you an 8-12% return in 252 trading days (one year's worth of stock market activity).

What do you think? Worth it or not? :D

inbox788
Posts: 4194
Joined: Thu Mar 15, 2012 5:24 pm

Re: Should we participate in ESPP?

Post by inbox788 » Tue Feb 07, 2017 12:52 pm

centrifuge41 wrote:15% discount is equal to 17.65% gain. All for 9 trading days of hold. Over 10% of your income, that's a 1.765% raise.

17.65% in 9 trading days (minus some fees). Vs a typical investment that gives you an 8-12% return in 252 trading days (one year's worth of stock market activity).

What do you think? Worth it or not? :D

I think you're double counting. Either use 10% income (year) * 15% discount or 17.65%gain * 5% income (6 months). Also, if you don't hold stock for a year, you won't get your 8-12%. I would ignore any potential gains in the 10 day period and if it averages out to zero over multiple purchases, I'd consider it a success.

Anyway, I would still do it. In general, I'd do ESPP unless it was a bad plan and so far I haven't noticed anything bad yet. The worst thing about it so far is that it's less good than the typical plan, but still good risk IMO.

SunThruMist
Posts: 7
Joined: Mon Feb 06, 2017 5:33 pm

Re: Should we participate in ESPP?

Post by SunThruMist » Thu Feb 09, 2017 10:23 am

Thanks for your input.

To summarize - this ESPP is generally a good deal, but with some risk. So my spouse and I need to discuss our risk posture more carefully. One thing I'm considering is treating this a bit as "play money," i.e. keeping the amount we contribute to less than 5-10% of our portfolio. 5% would be less than the max 10% income, but still a sizeable chunk of change. Anyway, it helps me put it in perspective.

In related news, they announced the proposed divestitures to satisfy the EU and the stock hasn't reacted. Additionally, the EU decision date got moved to April, so there now seems to be a window of time between the start of the offering period and the merger vortex. Maybe this is all playing psychological games with myself, but it does make me more willing to participate.

Cheers, and thanks again - I will update with what we do and how it goes :happy

SunThruMist
Posts: 7
Joined: Mon Feb 06, 2017 5:33 pm

Re: Should we participate in ESPP? (follow up question)

Post by SunThruMist » Wed Mar 22, 2017 1:03 pm

So, we each bought the max amount of stock through our ESPP. It has just posted to our accounts today, and I realized I don't know the mechanics of divesting it since I've never bought an individual stock before, nor transferred between brokerages. So, total newb question...

I want the money currently invested in our employer's stock in two Merrill Lynch individual investment accounts to go into the total stock market index fund in my Vanguard taxable account. If I sell all the shares by phone at Merrill Lynch, it's ~$10 ($25 min fee online) per account. As best I read the Vanguard summary, if I were to transfer the individual stock straight to Vanguard and sell there, it would be $7 (maybe x2). So eh on that. The complication is that half the money is in my husband's account, but would go into my taxable account, so that seems complicated. So do I:

a) transfer stock from Merrill Lynch to Vanguard, then sell and buy total stock market index fund (seems like there could be some complication here with spouse's stock)
b) sell stock at Merrill Lynch, put in ??money market?? ??cash??, then transfer to Vanguard (again, seems like there could be some complication here with spouse's funds)
c) sell stock at Merrill Lynch, deposit in my checking account (and spouse's), then shuffle around to Vanguard and buy total stock market index fund

Alternatively, spouse can open another taxable account at Vanguard, but it's kinda nice to not have so many accounts floating around. Spouse prefers to just dump the money into the one I have. Should I just call Vanguard? Seems like they'd have a bias for me to pay them fees.

Thanks for helping out a newbie :D .

anoop
Posts: 463
Joined: Tue Mar 04, 2014 1:33 am

Re: Should we participate in ESPP?

Post by anoop » Wed Mar 22, 2017 1:24 pm

The difference in those fees is noise. Do what is more convenient/simple.

For me, I would sell at ML, get a check and deposit it wherever.

SunThruMist
Posts: 7
Joined: Mon Feb 06, 2017 5:33 pm

Re: Should we participate in ESPP?

Post by SunThruMist » Wed Mar 22, 2017 1:32 pm

Thanks, anoop, that makes sense. :beer

anoop
Posts: 463
Joined: Tue Mar 04, 2014 1:33 am

Re: Should we participate in ESPP?

Post by anoop » Wed Mar 22, 2017 1:37 pm

I think it simplifies tax stuff to sell at ML since they have records of the purchase price and sell price, so you'll just have to refer to one statement when doing taxes.

centrifuge41
Posts: 1155
Joined: Mon May 17, 2010 9:04 am

Re: Should we participate in ESPP?

Post by centrifuge41 » Wed Mar 22, 2017 1:57 pm

C is probably easiest but not the cheapest. Our ESPP uses e-trade. I just sell on e-trade. I can import in the information of all the buy/sell/dividends when doing taxes. That information might not get passed on if you transfer shares to another broker.

B is also easy enough, if Vanguard can pull $ from ML directly. You'll have to find out if ML has a routing number and if the account behaves as if it were a checking account for ACH withdrawal purposes.

Post Reply