Stock Purchase Plan Benefit - Looking of Feedback on this Approach

[irie]

Ok, because of this forum I was able to learn about the company stock purchase bank benefit.

Details on SPP Benefit:

• Stock: ED
• $1 for every $9 of stocks purchase
• Allowed to purchase Fraction Shares
• 12 month & 1 day holding period
• Benefit is paid within 30days of stock purchase
• Must be purchased through plan administrator
• Plan administrator withholds taxes when selling stocks

The return on the investment in the stock is $1/$9 = 11.11%. Assuming the stock remains at the same price, not including dividends and a capital gains tax at sale of 15%, the total return would be 9.44%.

The thought process would be to sell the stock at the 13th month or when the stock price recovers above the amount paid and purchase again and get another 9.44% compounded.

Example:

Initial Investment: $1000
Sale at 1st Year & 1 Month: $1,094.44
Purchase & Sale at 2nd Y & 1M: $1,197.75
Purchase & Sale at 3rd Y & 1M: $1,310.82

@20 years: $6,074.66.

If I invested $1000 each month on the first year into the SPP and every month after the first 12 months sell and buy the stock then it would be $6,074.66 * 12 months (approximately) = $72,895.92 @ 20 years

There will probably be ups and down of the stock as well as I can buy $1000 per month of stock on top of what I initially purchase when I sell and buy the following year.

Does this make logical sense? Note, this isn't my primary investment. I already max my 401k and it is in a target date fund.

[irie]

Thanks for the feedback.

I just kept reading about it and I have a maximum stock purchase amount of $24,000. This is $2k per month. Seems like I can't just go ham on it but will try to maximize.

When I liquidate the stock, do you see any issue of using the same funds to purchase? Obviously up to the $24k limit per year. I haven't done the math yet on how long it would take but your right, I should liquidate and put the money into something else, i.e. some taxable account.

[shuffler]

Assuming the stock remains at the same price, not including dividends and a capital gains tax at sale of 15%, the total return would be 9.44%.

The discount ($1 in your example) is always taxed at ordinary-income tax rates.  I know you're intentionally ignoring the taxes in your math, but I wanted to point out that it's likely to be higher than the 15% cap-gain rate you're mistakenly applying.

References:
 * "Gains solely attributable to the discount are always taxed at ordinary income rates (at the time of sale)."
 * "a portion of the profit (the [discount]) is considered compensation income (taxed at regular rates) on your Form 1040."
 * Etc.

[secondcor521]

I did this with my ESPP for many years and pretty much did exactly as you describe in the OP.  I held each lot just long enough to get the LTCG rate and then sold.  You might lose a little on any given lot, but overall the odds are stacked pretty well in your favor, so if you do it long enough you're extremely likely to come out ahead.

I'd just tack on two smaller bits of advice here:

1.  Make sure you're not investing too much of your portfolio into your company stock.  Pick a percentage allocation you feel comfortable with and then calculate your contributions to make sure you stay within that limit.
2.  Someone else mentioned that the stock issues a dividend.  You might have the option to simultaneously enroll in a DRIP.  If I were in your shoes, I wouldn't.  First, it makes your taxes more complicated.  Second, it just compounds the problem of potentially having too much money tied up in company stock.

Good luck!

[irie]

Assuming the stock remains at the same price, not including dividends and a capital gains tax at sale of 15%, the total return would be 9.44%.

The discount ($1 in your example) is always taxed at ordinary-income tax rates.  I know you're intentionally ignoring the taxes in your math, but I wanted to point out that it's likely to be higher than the 15% cap-gain rate you're mistakenly applying.

References:
 * "Gains solely attributable to the discount are always taxed at ordinary income rates (at the time of sale)."
 * "a portion of the profit (the [discount]) is considered compensation income (taxed at regular rates) on your Form 1040."
 * Etc.

Wow ... I wasn't intentionally leaving out the non-capital gains tax. I didn't know the "discount" was treated as regular income. Thank you for letting me know!!

[irie]

True that.

[StudentEngineer]

I'd just tack on two smaller bits of advice here:

1.  Make sure you're not investing too much of your portfolio into your company stock.  Pick a percentage allocation you feel comfortable with and

Good luck!

I'd just like to reiterate secondcor521's point here, I'd max it out if I were you and if you have a sizable amount of assets elsewhere, in the short term you don't want to be too dependent on your company for your financial well-being.

[Car Jack]

My understanding as I read it.  You buy the stock at a discount, but then have to hold the stock for just about a year.  That would be a deal breaker for me and I'd invest zero.  I have worked at companies where the stock price a year after I buy has dropped dramatically under water.  In several cases, never to come back up again.  In my present company, we have a "normal" employee stock purchase plan.  They withhold 10% of my pay for 6 months.  I designate upcoming stock purchase as "sell on vest".  They buy and instantly sell my stock.  We get a 15% discount. 

[irie]

It depends on the company for sure.  In this case it's a huge energy company that's been around forever with a solid track record and a PE of 19.  The risk is relatively low compared to a startup or growth company.

Yes I believe it is relatively low. They have paid dividends for 42 consecutive years. With the changes going on in industry right now I believe they are not going anywhere any time soon. Especially after being the Utility for NYC.