Author Topic: ESPP - Actual Return/APR/APY/IRR over 21% with a 5% discount  (Read 2286 times)

bgp

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ESPP - Actual Return/APR/APY/IRR over 21% with a 5% discount
« on: November 11, 2015, 08:30:58 PM »
My employer offers an ESPP and has for years. A while back, before I joined, they changed it and made it less generous. Seems most long timers shun the plan. I gave it a look and the details are:

  • Employee Stock Purchase Price will be the FMV Closing price on the Offering Period End Date
  • Stock Purchase Discount Amount: 5.00%
  • Allowable Contribution Rate from Payroll Deduction:  1.00% - 25.00%   
  • Maximum Purchase Value per Calendar Year:  $25,000.00
  • Maximum Shares per Calendar Year:  5,000
  • Mandatory Holding Period for Stock Sales After Exercise: 0  days

The stock trades between $25 - $35 a share so I'll have to deal with the $25k limit before the 5k share limit. The offering period is 6 months - for example January 1 to June 30.

I'm looking at the potential gain, thinking I might be able to get 5% someplace else and still have full access. Perhaps move the gain from income to long-term capital gains (the 5% discount from the company is income NOT short term gains). So I ran some numbers and was surprised. The return is a LOT more then 5% because I'm not dumping the full amount in the account for the entire 6 month period! In fact the first deposit doesn't even happen until Jan 15th, 2016 making the entire period 5 1/2 months not 6.

CheckPrincipalInterest Paid To DateValue
15-Jan $500 0 $500.00
29-Jan $1,000 $4.64 $1,004.64
15-Feb $1,500 $13.96 $1,513.96
29-Feb $2,000 $28.00 $2,028.00
15-Mar $2,500 $46.81 $2,546.81
31-Mar $3,000 $70.44 $3,070.44
15-Apr $3,500 $98.92 $3,598.92
29-Apr $4,000 $132.31 $4,132.31
13-May $4,500 $170.64 $4,670.64
31-May $5,000 $213.97 $5,213.97
15-Jun $5,500 $262.34 $5,762.34
30-Jun $6,000 $315.79 $6,315.79

So this is assuming $500 every paycheck is deposited into an account. At the end, June 30th, a total of $6000 has been deposited and it is now worth 5.26% more when the ESPP is executed. The period rate is 0.9277%. When I look at the timing of the deposits I find an APR of 22.26% and a APY of 24.8% (or is this IRR).

This is the only hint I could find about the 5% actually being a LOT more:

http://blog.adamnash.com/2006/11/22/your-employee-stock-purchase-plan-espp-is-worth-a-lot-more-than-15/

I see time to hold risk (hours in my case) and lack of easy access as the only two down points. I'll take a $24.95 haircut to sell the shares. Am I crazy or is the little 5% a lot more and a great deal?
« Last Edit: November 12, 2015, 07:13:29 AM by bgp »

MDM

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Re: ESPP - Actual Return/APR/APY
« Reply #1 on: November 11, 2015, 09:05:50 PM »
    Employee Stock Purchase Price will be the FMV Closing price on the Offering Period End Date
    Stock Purchase Discount Amount: 5.00%
By this do you mean you get to buy the stock for 5% less than the closing price on the end date?

Quote
Sorry - this table looks much better in excel...
See http://forum.mrmoneymustache.com/forum-information-faqs/how-to-formatting-a-table/.

Quote
So this is assuming $500 every paycheck is deposited into an account. At the end, June 30th, a total of $6000 has been deposited and it is now worth 5.26% more when the ESPP is executed. The period rate is 0.9277%. When I look at the timing of the deposits I find an APR of 22.26% and a APY of 24.8% (or is this IRR).
Where does the interest come from?  In many (most?) ESPPs, no interest is paid on the payroll deductions - does your plan pay you interest?

To a rough approximation the company holds your money for 3 months then gives you a 5% return, so that is ~20% annualized (consistent with your APR/APY calculations).  Thing is, you can't do this four times a year.  If you do it twice, selling immediately after purchase and reusing the same $6K, you make ~10%/yr (minus transaction cost and taxes) on the $6K.  Seems a good way to pick up ~$400/yr net (assuming 25% tax bracket and $25 for each sale) - you just won't get rich on this alone.

bgp

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Re: ESPP - Actual Return/APR/APY
« Reply #2 on: November 11, 2015, 09:28:41 PM »
    Employee Stock Purchase Price will be the FMV Closing price on the Offering Period End Date
    Stock Purchase Discount Amount: 5.00%
By this do you mean you get to buy the stock for 5% less than the closing price on the end date?
Yes

Quote
So this is assuming $500 every paycheck is deposited into an account. At the end, June 30th, a total of $6000 has been deposited and it is now worth 5.26% more when the ESPP is executed. The period rate is 0.9277%. When I look at the timing of the deposits I find an APR of 22.26% and a APY of 24.8% (or is this IRR).
Where does the interest come from?  In many (most?) ESPPs, no interest is paid on the payroll deductions - does your plan pay you interest?

To a rough approximation the company holds your money for 3 months then gives you a 5% return, so that is ~20% annualized (consistent with your APR/APY calculations).  Thing is, you can't do this four times a year.  If you do it twice, selling immediately after purchase and reusing the same $6K, you make ~10%/yr (minus transaction cost and taxes) on the $6K.  Seems a good way to pick up ~$400/yr net (assuming 25% tax bracket and $25 for each sale) - you just won't get rich on this alone.


No interest - I was trying to relate the ESPP return to what kind of interest I would have to get to be equal to the ESPP return given the timing of the deposits (paychecks). For instance, I only loose access to the Jun 30th 'deposit' for a few hours before I sell the stock and have that money working someplace else. My goal was to get a better idea of the percent return so I could evaluate if the ESPP is better then anything else that would make the money grow.



msilenus

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Re: ESPP - Actual Return/APR/APY
« Reply #3 on: November 11, 2015, 10:16:54 PM »
Before buying the stock and getting the discount, your dollars are in the account for an average of about 3 months.  They earn 5% in that short time.  So the annualized return is around 20%.

Always take free money.

bgp

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Re: ESPP - Actual Return/APR/APY/IRR over 21% with a 5% discount
« Reply #4 on: November 12, 2015, 11:21:35 AM »
Thanks! Given the very high percent of salary you can contribute (25%) lots of employees could be reaching the $25k IRS cutoff (you need a base salary of $95k/yr). The ESPP looks like a nice ~$1200 a year in extra income and a great low/no risk return.

My numbers show a APR of 22.26% and an APY of 24.8% all with a simple 5% discount.

TheAnonOne

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Re: ESPP - Actual Return/APR/APY/IRR over 21% with a 5% discount
« Reply #5 on: November 12, 2015, 12:56:56 PM »
Thanks! Given the very high percent of salary you can contribute (25%) lots of employees could be reaching the $25k IRS cutoff (you need a base salary of $95k/yr). The ESPP looks like a nice ~$1200 a year in extra income and a great low/no risk return.

My numbers show a APR of 22.26% and an APY of 24.8% all with a simple 5% discount.

Well, it's a 5% discount on the original buy. It's hard to really say that it's a "Rate" because this isn't compounding ever. (By a dictionary it is, but in essence its just a cash bonus yearly)

It'll net you about $300 a year if your doing the 6k or 1.25k if you do the full 25k. Pretty good either way.

sisto

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Re: ESPP - Actual Return/APR/APY/IRR over 21% with a 5% discount
« Reply #6 on: November 12, 2015, 03:14:32 PM »
I wish my cap was that high. It used to be 10% of pay and was reduced to 5%. Luckily I get a 15% discount of the lowest price between the opening period and closing period. So yes, I take full advantage of the free money. :)

bgp

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Re: ESPP - Actual Return/APR/APY/IRR over 21% with a 5% discount
« Reply #7 on: November 12, 2015, 11:11:39 PM »
I wish my cap was that high. It used to be 10% of pay and was reduced to 5%. Luckily I get a 15% discount of the lowest price between the opening period and closing period. So yes, I take full advantage of the free money. :)

I would gladly trade you my high cap in exchange for your 15% discount with look-back! I could net the same and tie up less cash. You have a minimum return of 98.9% APY and the look-back provision has the potential to make it even better!

I curse when the Financial Accounting Standard Board (FASB) issued FAS 123(R) in December 2004 . They changed the accounting rules and companies are required to book an expense for their ESPP unless the discount is no more than 5% and the program doesn’t have a look-back provision. My company scaled back their ESPP plan to conform to FAS 123(R) by reduceding the discount from 15% to 5% and removing the look-back provision. All to keep the ESPP off their income statement!