Sanity Check: ESPP Not Worth It

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Topic Author
mlipps
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Sanity Check: ESPP Not Worth It

Post by mlipps » Tue Mar 17, 2020 4:50 pm

I'm eligible for my company's ESPP for the first time this quarter, but I think the discount is small enough it's not worth concentrating any risk in an individual stock. We're a well diversified holding company that trades on the S&P 500, so I think it's reasonably stable, but obviously everything is volatile in today's market. Here are the terms:

[Company] will buy Common Stock for you at the average of 95% of the market price determined as of the first day and the last day of the Offering Period. Each calendar quarter is a new offering period.

You may contribute a minimum of 1% and a maximum of 10% of your base pay blah blah blah (I wouldn't go higher then 2-3% I don't think).

Shares of Common Stock acquired under the Plan are not transferable until the expiration of fifteen (15) months after the last day of the Offering Period for which they were purchased, except in the event of death.

Based on my reading, this discount isn't very generous and the holding period is a bit longer than normal. Right now, I'm maxing out my 401k and Roth and the excess money will otherwise go towards my cash emergency savings, which is still a work in progress (currently about 2-3 months expenses, adding another month every other month or so). If anyone thinks this is a screaming deal & I should jump on it I'd be willing to reconsider.

cogito
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Re: Sanity Check: ESPP Not Worth It

Post by cogito » Tue Mar 17, 2020 4:52 pm

If the holding period is 15 months for a 5% discount, I would put 0%, none, nada of my income into that program.

Jack FFR1846
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Re: Sanity Check: ESPP Not Worth It

Post by Jack FFR1846 » Tue Mar 17, 2020 4:54 pm

Any holding period requirement would be a non-starter for me. Pass.
Bogle: Smart Beta is stupid

Topic Author
mlipps
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Re: Sanity Check: ESPP Not Worth It

Post by mlipps » Tue Mar 17, 2020 4:55 pm

cogito wrote:
Tue Mar 17, 2020 4:52 pm
If the holding period is 15 months for a 5% discount, I would put 0%, none, nada of my income into that program.
5% discount on the average of open/close price, not lowest...so I get hosed if it crashes during the offering period right??

raveon
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Re: Sanity Check: ESPP Not Worth It

Post by raveon » Tue Mar 17, 2020 4:58 pm

I would give it last priority but still contribute. Getting 5% return is not bad. The return will be much higher if the price on the last day of the offering period is significantly higher than the first day. And if the company is trading down, you would accumulate more shares. You can look at the price history chart of your company.

My company gives 15% discount between first/last day of offering period. They also have the option to sell immediately the next day (it would trigger short term capital gains however). But I hold for a minimum of 18 months.

I invest 10% in ESPP after maxing out 401k/IRA/HSA.

Patzer
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Re: Sanity Check: ESPP Not Worth It

Post by Patzer » Tue Mar 17, 2020 5:04 pm

I have done this before, but it was at a 15% discount and a 180 day holding period.
Buying doubly* undiversified company stock at only a 5% discount and a 15 month holding period sounds like a bad deal.

This is doubly undiversified, because:
1. It's a single stock
2. The stock is also your source of income

Don't do it.

cogito
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Re: Sanity Check: ESPP Not Worth It

Post by cogito » Tue Mar 17, 2020 5:07 pm

mlipps wrote:
Tue Mar 17, 2020 4:55 pm

5% discount on the average of open/close price, not lowest...so I get hosed if it crashes during the offering period right??
From the plan description you posted, it sounds like there is no risk during the offering period, so no, I don't believe so. But you could get hosed by being forced to hold a single stock, your employers, for 15 months.

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watchnerd
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Re: Sanity Check: ESPP Not Worth It

Post by watchnerd » Tue Mar 17, 2020 5:09 pm

I love my ESPP, but it's a 10% discount and purchases quarterly.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

Topic Author
mlipps
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Re: Sanity Check: ESPP Not Worth It

Post by mlipps » Tue Mar 17, 2020 5:17 pm

cogito wrote:
Tue Mar 17, 2020 5:07 pm
mlipps wrote:
Tue Mar 17, 2020 4:55 pm

5% discount on the average of open/close price, not lowest...so I get hosed if it crashes during the offering period right??
From the plan description you posted, it sounds like there is no risk during the offering period, so no, I don't believe so. But you could get hosed by being forced to hold a single stock, your employers, for 15 months.
But it's 95% of average of first & last price? So if it starts the quarter at $200 and ends at $150, I have to buy at 95% of $175, so there's an immediate loss of $25/share.

I'm doing a great job talking myself out of this. Just making sure I'm not missing anything. All the pandemic frenzy is giving me the overwhelming urge to do SOMETHING but I know it's not the rational choice.

raveon
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Re: Sanity Check: ESPP Not Worth It

Post by raveon » Tue Mar 17, 2020 5:20 pm

But it's 95% of average of first & last price? So if it starts the quarter at $200 and ends at $150, I have to buy at 95% of $175, so there's an immediate loss of $25/share.
No way... Most likely, it is 95% of 150. The 'average' is most likely the average trading price of the day. Talk to your HR.

heyyou
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Re: Sanity Check: ESPP Not Worth It

Post by heyyou » Tue Mar 17, 2020 9:11 pm

The single stock risk, plus the employer stock risk, are just too concentrated. Buy a little so you can say that you are a stockholder when at meetings. Yes, some one coworker will get lucky on high risk/high reward, and a hundred other employees with different start dates or different selling dates, will get hosed.

Dilute your risks by owning stock index funds. They have plenty of risk, but less than employer stock ownership.
How is the ESPP working out for airline employees, these days?

SnowBog
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Re: Sanity Check: ESPP Not Worth It

Post by SnowBog » Wed Mar 18, 2020 12:25 am

mlipps wrote:
Tue Mar 17, 2020 4:50 pm
Shares of Common Stock acquired under the Plan are not transferable until the expiration of fifteen (15) months after the last day of the Offering Period for which they were purchased, except in the event of death.
Recommend you get clarity on what the 15 month period actually restricts.

In my ESPP plan, I have a similar can't transfer for X months. I assume this is related to your employers requirement to report "disqualified" sales if you sell less than X after getting the shares.

However I can sell shares immediately.

If you can sell immediately, this should be a "no brainer". It's "free money".

I personally try to max out my annual ESPP limit. I treat this as "delayed income", basically my ESPP contribution is returned [after selling] quarterly (my purchase period) with a built in "pay raise" (the ESPP discount off current shares prices). The "cash" can be used as needed (refill savings, retirement investments, etc.).

Edited to add: I missed your discount is 5% off the "average" of open/close... Mine is 10% of close. I'd think under "normal" conditions (when we expect sticks to generally be rising), yours seems like a "better" deal. But in this crazy market, an average of the past three months isn't necessarily "free money" anymore...

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