Author Topic: Invest in company stock @ 20% discount?  (Read 4944 times)

Kroaler

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Invest in company stock @ 20% discount?
« on: August 31, 2016, 11:53:51 AM »
Hi all!  Quick question would like your opinions.

My wife works for a large tire manufacturer. (think big white fluffy guy)

As an employee, she can buy stock at a 20% discount, the only deal is that the stock cant be sold for 5 years. ( I assume to prevent wholesaling, if it has to be sold, I think the 20% discount has to be repaid or something similar) They also match the first 5 shares purchased with 5 more shares. After 5 years, it is fully yours to do with as you please with no restriction.  Also this is AFTER tax investment.

The total purchased value cannot exceed 10% of the employees earning for a year.


Ive seen this type of question about employee stock options ask before, but I dont believe there was a discount?

Given the 20%, would you put some of your investment dollars into the company you work for if you worked for a global company?

What is everyone's opinions?  At face value, 20% discount + 5 free shares looks like a fair value to me.    But maybe this is still not good since its not diversified? 

Let me know what you guys think.

trashmanz

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Re: Invest in company stock @ 20% discount?
« Reply #1 on: August 31, 2016, 11:59:43 AM »
Personally I wouldn't have any problem with buying some, provided it is a small percentage of assets and the rest of the assets are well diversified (think, play money).

SuperSecretName

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Re: Invest in company stock @ 20% discount?
« Reply #2 on: August 31, 2016, 12:01:15 PM »
Without a doubt, get the 5 free shares a year.  That is a 100% return.

I'd pass on the 20% - 5 years is way too long for me.

Frugal D

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Re: Invest in company stock @ 20% discount?
« Reply #3 on: August 31, 2016, 12:01:51 PM »
I'm of the opinion that you're already inherently long your company by your job itself and that you don't need any additional exposure. That said, if you work at a young and promising company it might be worth adding some of that discounted equity. I don't think a tire company falls under young and promising.

neil

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Re: Invest in company stock @ 20% discount?
« Reply #4 on: August 31, 2016, 01:01:26 PM »
Taking full advantage of this program would essentially mean having 50% of your income (10%x5years) continuously exposed to your company for the benefit of a 20% discount plus 25 shares.  Consider what that means to your portfolio.

Hedging (ideally by shorting or buying puts) is likely forbidden by plan rules.  Doing so to guarantee return puts your job at risk.

I agree the share match seems to provide significant guardband (60% discount effectively) and far less exposure (whatever 50 shares is roughly worth).  I assume share match is totally lost on a premature sale and as a result you might as well commit five years regardless of performance.

A company being large doesn't necessarily make it much safer than smaller companies.  VW, for example.  If you buy $100 shares for $80, then the stock goes to $50 and you are no longer comfortable with the plan and decide to sell, being on the hook for for the discount only leaves you with $30 after a premature sale.  The dollar amount loss per share is the same in this case, but your percentage return is actually worse.  Not a free lunch for sure - looks more like a free loan that is forgiven after five years when the terms of the forgiveness is met.

What happens to this deal if you are terminated or quit?  If this benefit is contingent on employment, five years sounds much too long, even for the match.

Bottom line: statistically you are better off buying in, but it is far from any guarantee and complicates your portfolio.

Proud Foot

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Re: Invest in company stock @ 20% discount?
« Reply #5 on: August 31, 2016, 01:03:09 PM »
If I were in your situation I would do it.  But I would do it only for enough to get the 5 free shares and only after all the tax advantaged investment space had been used up (since you said it is after tax).  Like Frugal D, I also am of the opinion that your'e already invested in the company as they are your employer and would want other investments for diversity.

seattlecyclone

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Re: Invest in company stock @ 20% discount?
« Reply #6 on: August 31, 2016, 01:32:12 PM »
In general I support making bets when:
1) The odds are in your favor, and
2) The consequences of an adverse outcome would not be catastrophic.

For those first few shares, the odds are definitely in your favor. You're essentially getting ten shares for the price of four. The company would have to underperform the market by a significant margin for you to lose compared to other investments.

What about the second criterion? If you participated in the program for five years, had 50 shares, and the company went bankrupt making your investment worthless, how much would that set you back in your FIRE plans? If this stock makes up a significant percentage of your net worth you might not want to risk it in that manner. If you're talking about 5% or less of your net worth in the company stock, the consequences of losing it are much less significant.

jjandjab

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Re: Invest in company stock @ 20% discount?
« Reply #7 on: August 31, 2016, 04:46:41 PM »
I would absolutely buy the first 5 shares and get the 5 share match. Based on your thinly veiled reference, this company has been very stable for a long time (stock actually pretty closely tracks the SP500 over the long term) and the stock also pays a current 3.2% dividend yield. Since you get a 20% price discount, that actually gives you an effective dividend yield of 4% per share. And the company is highly unlikely to go out of business.

I would strongly think about buying more as long as you have other retirement plan assets, etc. Honestly, even if it drops 20% in 5 years, you will have made your 4% yield per year for 5 years. And if it stays flat or goes up, then you have made out like a bandit. To me, this is not like buying shares in cousin Joe's tech startup, so I would really think about participating to as big a degree as you feel comfortable. I would feel the same about lots of large, historically stable companies with good reputations
« Last Edit: August 31, 2016, 07:24:30 PM by jjandjab »

CanuckExpat

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Re: Invest in company stock @ 20% discount?
« Reply #8 on: August 31, 2016, 04:59:38 PM »
I would skip the shares with the five year waiting plan. That is far too long a vesting period to take on the risk. I mean throw a small amount at if you will, but don't go full hog.

Kroaler

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Re: Invest in company stock @ 20% discount?
« Reply #9 on: August 31, 2016, 06:44:06 PM »
Lots of different thought processes!   I'm already maxing 401k + IRA for me and my wife.
I'll probably take the free shares for sure, then possibly just invest whatever after tax money is left over from my real estate investment pursuits.   Will probably be something like 3% of our overall earnings.

Thanks for the replies!

MustacheAndaHalf

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Re: Invest in company stock @ 20% discount?
« Reply #10 on: August 31, 2016, 09:47:15 PM »
How do they handle an employee who quits or is fired?

If they reverse everything and give you back your cash, that's like losing any chance of growth on that money when you don't stay 5 years.  I'd weigh that against how long your wife has worked there, and any upcoming plans for the next ~8 years.  You're not just buying this year (+5 years) but next year (+6 years from now) and so on.  At some point you need to know how 4 years of in progress vesting works.

You said 3% of NW, but that's the first year.  When you have several years of this, it might become a larger percentage.  So estimate what happens if you do this for 5 years, and how comfortable you'll be with it.

JJ

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Re: Invest in company stock @ 20% discount?
« Reply #11 on: September 01, 2016, 12:11:08 AM »
Is it a growing company with good prospects? Buying a dud at a discount is still buying a dud. Don't look at investments based on whether they are cheap, look at them based on whether they are good and then figure out how much you would like to pay.

A lot can go wrong in 5 years, but if it has 20 years of pretty consistent growth then it's likely not a bad place to park some money.

Kroaler

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Re: Invest in company stock @ 20% discount?
« Reply #12 on: September 01, 2016, 08:10:09 AM »
Just as an update, I read the full documentation.  There is NO PENALTY for termination.     If your employed with the company, you have to wait 5 years before taking control, however if your employment is terminated (by your or the employer) the shares become yours with no penalty to either sell, or continue to hold. 

So with that in mind, does anyone have a change in their original opinion knowing that the discount doesnt have to repaid at termination, and that the 5 year wait only applies while employed? 

Spork

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Re: Invest in company stock @ 20% discount?
« Reply #13 on: September 01, 2016, 08:19:19 AM »

I would definitely do it.  I would keep my overall holdings low (in comparison to other holdings), but I would absolutely do it.

I participated in a similar plan at a tech employer many years ago.  I believe our hold period was more like 3 years, but we did have a 20% discount.  When the dotcom bubble popped, the company stock dropped to 1/10th of it's price.  Suddenly with each paycheck you weren't buying one share;  you were buying 10.  It was a very large company (like yours) that was very unlikely to go away entirely.  I didn't have a ton of money in the plan, but when the market recovered I made about 4x my initial investment.

FIPurpose

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Re: Invest in company stock @ 20% discount?
« Reply #14 on: September 01, 2016, 09:54:41 AM »
I'm not on the same boat as everyone else here running and screaming from a 20% discount stock. That would be awesome! My company only sells us stock at a 5% discount. It's a company with a product that is not going away; is not in decline; and is widely recognized. It has a great dividend; good solid growth over the past 15 years (with a big spike then slump in 08). It's not risk free, but they are throwing the odds in your favor in a huge way! I agree with a previous poster that I wouldn't buy it if the company's financials are bad, but buying a good company at 20% less and is currently at a p/e of 14 is a no brainer.

I also disagree with the people here saying to only buy up to the 5 free stock. What is that $500? If you're only going to bother with buying 5 stock, why even bother? I get it, it's a free almost $500, but messing with those accounts takes a lot of time and I personally would only do it if I was interested in actually buying the stock for real.

zombiehunter

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Re: Invest in company stock @ 20% discount?
« Reply #15 on: September 01, 2016, 10:45:52 AM »
I would max this opportunity.  OP mentioned he's maxing out 401k and IRA options, so he's going to be fairly diversified. 

The above math seems fuzzy to me, such that the 'cost' is 50% of your income (because 10%x5 years) for 20% discount -- but not 100% because 20%x5 years?

Basically what you have here is a huge equity cushion from the discount, plus the 5 free shares.  Looks like the stock is trading right now around $90-94, so assuming a $100k income, you could put in $10k per year to get stock at $72, plus about $450 "free" in the 5 shares.  That's roughly $3500 for "free".  Pick that up for 5 years, and it is $17,500 (nearly a full year's max on 401k).

TexasRunner

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Re: Invest in company stock @ 20% discount?
« Reply #16 on: September 01, 2016, 10:50:42 AM »
Was the question ever answered if he had to repay if he left the company within five years?  If he gets to keep it, then sure- its free money for leaving stock alone for five years.  If he can't keep it after leaving, WAY too much risk for my tastes.  Five years is a long time, and it essentially turns the purchased stock into golden handcuffs.

tonysemail

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Re: Invest in company stock @ 20% discount?
« Reply #17 on: September 01, 2016, 11:30:12 AM »
i've fallen for the lure of ESPP.
my company stock is 6% of my net worth.
but it makes me disproportionately happy when the stock is up.

also keep in mind, if you strike gold and ESPP becomes a big fraction of net worth, then you can always trim it back.
Yes, you'd be giving back some of the 20% discount, but the stock has grown a lot which makes it a good trade anyway.

Axecleaver

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Re: Invest in company stock @ 20% discount?
« Reply #18 on: September 01, 2016, 02:53:48 PM »
ESPP plans are great. Very few of the rank and file employees make use of them, which is a shame. Five years restricted is a long time, but that's a very blue chip, stable stock with a nice dividend. In your shoes I would dump the max (10% of her income) into it. You're getting a 20% return on investment the minute you buy it. If she ends up leaving, then you wait a year to sell (avoid short term cap gains). If she ends up staying longer than five years, every month you sell off whatever shares become unrestricted, and put it into your taxable savings. So your max exposure is still only five years x 10% = ~50% of a year's salary.

The reason you often hear advice not to load up on company stock, is because of people who don't have other savings. Diversify away from it as soon as you can and reap the sweet rewards of ESPP discounts in the meantime.


thedayisbrave

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Re: Invest in company stock @ 20% discount?
« Reply #19 on: September 01, 2016, 03:53:43 PM »
ESPP plans are great. Very few of the rank and file employees make use of them, which is a shame. Five years restricted is a long time, but that's a very blue chip, stable stock with a nice dividend. In your shoes I would dump the max (10% of her income) into it. You're getting a 20% return on investment the minute you buy it. If she ends up leaving, then you wait a year to sell (avoid short term cap gains). If she ends up staying longer than five years, every month you sell off whatever shares become unrestricted, and put it into your taxable savings. So your max exposure is still only five years x 10% = ~50% of a year's salary.

The reason you often hear advice not to load up on company stock, is because of people who don't have other savings. Diversify away from it as soon as you can and reap the sweet rewards of ESPP discounts in the meantime.
+1

Kroaler

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Re: Invest in company stock @ 20% discount?
« Reply #20 on: September 01, 2016, 03:57:26 PM »
ESPP plans are great. Very few of the rank and file employees make use of them, which is a shame. Five years restricted is a long time, but that's a very blue chip, stable stock with a nice dividend. In your shoes I would dump the max (10% of her income) into it. You're getting a 20% return on investment the minute you buy it. If she ends up leaving, then you wait a year to sell (avoid short term cap gains). If she ends up staying longer than five years, every month you sell off whatever shares become unrestricted, and put it into your taxable savings. So your max exposure is still only five years x 10% = ~50% of a year's salary.

The reason you often hear advice not to load up on company stock, is because of people who don't have other savings. Diversify away from it as soon as you can and reap the sweet rewards of ESPP discounts in the meantime.

I like this!  The idea of selling unrestricted stock monthly is great. Would have never thought of thay on my own. This will most likely be what I do.

boarder42

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Re: Invest in company stock @ 20% discount?
« Reply #21 on: September 02, 2016, 06:42:25 AM »
awesome late to this party but glad you made the correct choice.  its a great system its 20% instant free gains.

jjandjab

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Re: Invest in company stock @ 20% discount?
« Reply #22 on: September 02, 2016, 07:06:27 AM »
Yes, happy to see some more vouching for taking advantage of this deal as much as possible. By simple math if you buy the shares at a 20% discount and get a roughly 3% per year effective dividend yield (which I don;t see many talking about but in my mind is a very important part of this situation), even if the share price is completely flat over 5 years you will have made a 35% gain (20% stock price discount at purchase + 3% x 5 years) - not bad to get 7% per year with pretty low risk... And that's not including the free shares, which really puts the deal over the top as below:

Say she buys 20 shares at $100 current price (so pays $80 with the discount) + 5 free shares. You would pay $1600 for $2500 worth of shares. Then you would get $75 in dividends per year at 3%. So at the end of 5 years you would have paid $1600 for $2875 in return - so that's an 80% return on your money in 5 years. What is also means is that even if the stock was down 50% in 5 years, you would still break even (2500 goes to 1250, but still get your 375 in dividends.). And if it goes up, then you are totally making out.  Obviously the math changes a bit with more or less shares, but absolutely no way you can't take advantage of this offer...
« Last Edit: September 02, 2016, 07:10:05 AM by jjandjab »

Kroaler

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Re: Invest in company stock @ 20% discount?
« Reply #23 on: September 02, 2016, 07:55:53 AM »
This will probably be my last post for this thread.  I've decided to take full advantage of the opportunity.  I now have 2 options for buying.

1.) Buy 10% in one lump sum  OR

2.) The company will give an interest free loan to buy 10% all at once and it can be paid back in substantially equal portions out of each paycheck.  If employment terminates before the loan is repaid the employee has to repay the loan  (I keep this amount on hand usually...) or enough shares will be sold to cover the difference. 

The employee price is a "reference" price so it stays the same throughout the year.   


My current thought is to take the loan and do all 10% at the reference price ( The reference price is set by a multi week average at the time the ESP enrollment begins).

  Does anyone see flaw in my logic?

boarder42

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Re: Invest in company stock @ 20% discount?
« Reply #24 on: September 02, 2016, 08:00:50 AM »
uh duh?

interest free loans are always best. 

i'll let you buy this car ... you can either pay me 6k now or 500 a month for 12 months.  yeah i'll take the free loan.  and in this case its on something instantly worht 20% more that will pay dividends and grow. 

TexasRunner

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Re: Invest in company stock @ 20% discount?
« Reply #25 on: September 02, 2016, 08:25:31 AM »
uh duh?

interest free loans are always best. 

i'll let you buy this car ... you can either pay me 6k now or 500 a month for 12 months.  yeah i'll take the free loan.  and in this case its on something instantly worht 20% more that will pay dividends and grow.

Bingo!  If you have enough cash on hand that leaving wouldn't be a problem, have at it and good luck.  :)

Dicey

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Re: Invest in company stock @ 20% discount?
« Reply #26 on: September 02, 2016, 08:54:47 AM »
The only unanswered question I have is "Does your wife like her job?" If buying in would make her feel pressured to stay, I'd have a frank "What would we do if?" conversation before pulling the trigger and taking the loan. And five years is nothing, man. This is a solid opportunity to add to your balanced portfolio.

FWIW, I wish it was a forum rule that you had to read and understand the question before responding. Gah!

CanuckExpat

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Re: Invest in company stock @ 20% discount?
« Reply #27 on: September 02, 2016, 12:11:18 PM »
If it works for you, and you are comfortable with the risk, and it's in the bounds of your Investment Policy Statement, then go for it.

My caution is, if I'm understanding, it's still not risk-free nor along the lines of free money. Some employee stock purchase plans are essentially free money (buy at xx% discount, you can sell immediately), other then thane fluctuations between when you are granted, and when you can sell, that is almost risk free, and free money. The way I understand your plan, you get a 20% discount, but you are taking on five years of risk in holding a single company (either that it could decline, or generally under perform the broader market).

I wouldn't do it, because my investment policy doesn't include individual stocks, and the golden handcuff risk is too great (also, I've never managed to hold a job more than two years). But if you understand the risks, and it works for you, then go for it.

boarder42

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Re: Invest in company stock @ 20% discount?
« Reply #28 on: September 02, 2016, 12:35:20 PM »
i'll gladly wear the golden handcuffs my company provides me.  could i make more base and bonus else where maybe. but our stock that is a private ESOP is unheard of anywhere as far as how the profit is distributed yes its to everyone and yes its very equal. and the gains are unmatched.  could it enron ... maybe but unlikely.  for the OP i guess its more a 4% bump on a per year basis.  which at a large company like that that's paying dividends already is huge. even if it underperforms the market it has to do so at 4% less annually to be a losing proposition.

K-ice

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Re: Invest in company stock @ 20% discount?
« Reply #29 on: September 02, 2016, 02:25:23 PM »
Will probably be something like 3% of our overall earnings.

I would go for it. You sound well balanced in other assets and real-estate.

I would also make sure it wasn't more than x% of your overall investments. Set your limit at 5-10% and re-balance by purchasing less (just 5 or none) in future years if necessary.

MoonLiteNite

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Re: Invest in company stock @ 20% discount?
« Reply #30 on: September 03, 2016, 05:13:00 AM »
I personally love ESPPs.
I just sold around 3 years worth last week, put 11k in and pulled out 24k.

Just had another buy in go through today.... ummm looks like pretty good returns.... as is


Provided they have 2 or more dates that they pick from (and go with the lower date) then put in the 20% off. It is pretty much impossible to lose money. Just have it set to auto sell.
Sadly looks like with her plan, she can't sell. Lucky for her, i think the white fluffy dude is a pretty good standings and the stock won't be tanking any time soon. Also dividends add up!
http://www.michelin.com/eng/finance/individual-shareholders/michelin-dividend-information

edit:
up to 15%, can never raise during the buy period, only go lower
15% only includes the 40hr work week, no OT or DT included.
There is a flat $$$ cap that i am not even close to.
« Last Edit: September 03, 2016, 05:23:20 AM by MoonLiteNite »