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Continue ESPP or Stop

Posted: Fri Mar 09, 2018 11:34 pm
by teramesher
I have been contributing roughly $1,000 every month towards my company's ESPP program. It's only 5% discount from the closing price at the end of each quarter. For years, I have been cumulating the ESPP shares, then selling batch of shares that become long term. Then the money is invested towards VTI.

I am debating whether it makes sense to stop ESPP and contribute the same amount to VTI monthly instead. This allows me to put my money to work every month instead of quarterly. Also the stock price of my company has been flatlining for the last few years. Thoughts?

Re: Continue ESPP or Stop

Posted: Fri Mar 09, 2018 11:41 pm
by krusty007
An ESPP is probably your best investment. How else can you get at least 5% guaranteed return per quarter? Really it’s more like 5% return for a month and a half. If the stock rises at all, it’s more.

I suggest you keep doing what you’re doing.

Re: Continue ESPP or Stop

Posted: Fri Mar 09, 2018 11:44 pm
by Watty
An alternative would be to just sell it right away.

Assuming that you do not have a requirement to hold the stock then every quarter you could sell the $3,000 in stock right away and clear $150 assuming that the stock price does not change in the few days that it takes to process the stock. You could do that four times a year and get $600. That would assume that would be taxed as ordinary income but that is still an almost risk free 20% return on the same $3,000 you would be reusing each quarter.

Re: Continue ESPP or Stop

Posted: Fri Mar 09, 2018 11:48 pm
by Darth Xanadu
5% discount is not great, and if stock hasn't moved even a lookback feature won't be very valuable. What I would do is continue to participate but forget about long-term gains treatment and sell as soon as possible after purchase. I believe (but I'm not certain) that the discount portion is taxed as ordinary income anyway so not really getting much advantage by waiting. The funds you get from selling ESPP shares can be invested elsewhere. The discount is not great but at the same time free(ish) money.

For what it's worth, I participate in my ESPP and just recently (due to BH influence) decided not to maintain my concentrated position in company stock. Just sold a bunch today as we hit all time highs at open.

Re: Continue ESPP or Stop

Posted: Sat Mar 10, 2018 2:28 am
by teramesher
Watty wrote:
Fri Mar 09, 2018 11:44 pm
...is still an almost risk free 20% return on the same $3,000 you would be reusing each quarter.
$600 return on $12,000 is still 5%, no?

Re: Continue ESPP or Stop

Posted: Sat Mar 10, 2018 3:17 am
by inbox788
I would continue. You're getting a free 5% up to 4 quarters, so up to 20% return on a quarter of the annual investment if you sell as soon as you can. What is the reason for holding to long term gains when you stock isn't moving? Anyway, holding a year may not be a bad thing in general. In your specific case, your stock isn't performing, but it might have outperformed VTI just as well. Over time, I think things will average out, and even if they don't you've got that 5% quarterly advantage that's about as close to a free lunch as you'll see.

Re: Continue ESPP or Stop

Posted: Sat Mar 10, 2018 7:43 am
by Watty
teramesher wrote:
Sat Mar 10, 2018 2:28 am
Watty wrote:
Fri Mar 09, 2018 11:44 pm
...is still an almost risk free 20% return on the same $3,000 you would be reusing each quarter.
$600 return on $12,000 is still 5%, no?
If you can sell the stocks every three months as you get it you would never have more then $3,000 invested in the company stock.

Re: Continue ESPP or Stop

Posted: Sat Mar 10, 2018 9:46 am
by random_walker_77
Watty wrote:
Sat Mar 10, 2018 7:43 am
teramesher wrote:
Sat Mar 10, 2018 2:28 am
Watty wrote:
Fri Mar 09, 2018 11:44 pm
...is still an almost risk free 20% return on the same $3,000 you would be reusing each quarter.
$600 return on $12,000 is still 5%, no?
If you can sell the stocks every three months as you get it you would never have more then $3,000 invested in the company stock.
Furthermore, if you sell every quarter, then over time you have an average of $1500 invested. Find me a bank where you can buy a 3 month CD that'll let you invest $1500 and pay you $150 in just 3 months! I believe you'll find that requires something paying an APR of 21.6% 47%

So, for a smidgen of risk, this is still a really good deal. Sell immediately and claim the free money. Unless, the hassle and tax paperwork means the free $600 isn't worth it to you.

[edited b/c I understated the interest by about half. It's not 5% in 3 months but really 10% given that the average daily balance over the 3 months is half of the nominal amount. ]

Re: Continue ESPP or Stop

Posted: Mon Mar 12, 2018 4:19 pm
by teramesher
random_walker_77 wrote:
Sat Mar 10, 2018 9:46 am

Furthermore, if you sell every quarter, then over time you have an average of $1500 invested. Find me a bank where you can buy a 3 month CD that'll let you invest $1500 and pay you $150 in just 3 months! I believe you'll find that requires something paying an APR of 21.6% 47%
Can you ellaborate how you arrived at $1500 average invested and 57% APR?

Re: Continue ESPP or Stop

Posted: Tue Mar 13, 2018 12:19 am
by random_walker_77
teramesher wrote:
Mon Mar 12, 2018 4:19 pm
random_walker_77 wrote:
Sat Mar 10, 2018 9:46 am

Furthermore, if you sell every quarter, then over time you have an average of $1500 invested. Find me a bank where you can buy a 3 month CD that'll let you invest $1500 and pay you $150 in just 3 months! I believe you'll find that requires something paying an APR of 21.6% 47%
Can you ellaborate how you arrived at $1500 average invested and 57% APR?
Let me try...

Part 1, $1500
If you buy a 3 month CD, you have to deposit the full amount up-front. For the ESPP plan, you put in 3K over 3 months via payroll deductions. So it's not apples-to-apples, agreed? You've got $0 invested at the beginning! And hardly anything invested that first month. So let's find the equivalent.

You've got ($500 for 2.5 months, $1K for 2 full months, . . ., 2.5K for half a month, $3K for 0 days). So the argument here is that your (dollars invested * time invested) is equivalent to $1500 for 3 months, b/c on average, your money was in for half the time. And then you get paid 5% of the full 3K, which is 10% of the equivalent amount you've invested.

Part 2, 47%
First, let me give an intuitive explanation of why the 47% number is reasonable. Now 10% paid in 3 months is pretty good. If you just multiply that rate out by 4 quarters for the full year, you get 40%. But you get the effects of compounding too. That 10% from the first quarter (let's call that "Q1") gets another 10% each quarter for the next three quarters. The 10% from Q2 gets interest for 2 more quarters, Q3 gets interest for one more quarter. 10% of 10% is 1%. So 3% from the interest on Q1's interest, plus 2% from Q2's interest, plus 1% from Q3's interest.. well, that's 6%. The interest's interest also earns interest, which gets you to 47%.

Algebraically, the way I found this was to first find the daily interest rate...

Re: Continue ESPP or Stop

Posted: Tue Mar 13, 2018 12:39 am
by random_walker_77
Let d be the daily rate. What rate earns 10% in 91 days?

(1+d)^91 = 1.10
Solve:
91*log*(1+d) = log(1.10)
(1+d) = 10^( (log(1.10)) / 91 ) = 1.001047913 ==> 0.1048% per day

Now find the annual rate. How much would this daily rate compound to in 365 days?

= (1+d) ^ 365 = 1.46563 ==> 46.56%

(ok, so I rounded on my earlier answer)

Since CD rates are advertised as annual APR's, the 46.56% is the equivalent rate you're getting from that ESPP plan. Too bad they cap how much you can put in.

Equivalent rates
5%, 6 months: 21.1%
5%, quarterly: 46.56%
15%, 6 months: 69.2%

If the plan gives you the lowest price of the beginning or end of the purchase period, it can be much much more lucrative.