Author Topic: Company stock purchase plan - How to destribute risk over time  (Read 313 times)

BobTheBuilder

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Dear all,

I've seen plenty remarkably smart ideas in this forum over time, and I would like to pick your brains about this one, which should be applicable to many folks out there who have a stock purchase plan whith their company.

Basic idea: you get a disount on the shares, lock up capital for quite a long time, and have a risk of losing your job and the worth of the shares if everything goes south at once.

Here a my assumptions:
  • The company matches your contribution with 30%: for 200$ of shares, you pay 140$
  • Monthly contribution is fixed for a year: Let's assume a realistic 200$ / 140$
  • Lock up period is 2-3 calender years: All stock purchased any month in 2020 may be sold starting Jan 1st, 2023, purchases from 2021 may be sold Jan 1st 2024 and so forth
  • Dividend payout is 2% via DRIP that could be sold immediately (transaction cost makes it unreasonable to sell such a small amount)
  • If you increase your contribution to a maximum of 1000$ per month, the match of the company reduces to 15% (meaning you pay 680$ for 800$ worth of additional shares per month)

Assuming stationary prices, the amount of company stock you have would ramp up from 0 to ~7200$ before you could sell any, and than you are free to unload the first 2400$ worth of shares.
Any ideas on "frontloading" the risk during the first accumulation phase?

The company is solid, think something like Honeywell, with one sector that performs mediocre and one that performs well.

How would you play such a plan, knowing
  • Current price of stock is 85$
  • You could use put options to hedge, cost of hedging to 60$ (70.5% of stock price) for 3 years is approx. 13%
  • You have a 30% or 15% reduction in base cost as a result of the employer match
  • Use the dividend for paying for part of the heding
  • Capital is locked up during the no-sell period
  • Selling covered calls is a problem, even after transferring stock: Individual stock price is to high to hit the 100 option contract size without spending large sums per year on stocks

What do you think? Would you go the maximum contribution and hedge (part of) it? Any really smart ideas of what to do with the rebate, or how to fix the lock-up problem maybe using options?


MustacheAndaHalf

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Re: Company stock purchase plan - How to destribute risk over time
« Reply #1 on: March 05, 2021, 06:05:45 AM »
I wouldn't short the company stock or buy put options until you read your employment agreement: my guess is they forbid those actions.

It sounds like an Employee Stock Purchase Plan (ESPP) with a lock-up period.  That $200 of stock for $140 actually builds in a gain of +43% (200/140).  The $60 is a smaller fraction of $200 (30%) than it is of $140 (43%).  So that's worth it.... I would stay away from the 15% discount, given the length of the lock-up.

The less of your net worth goes into one company, the better.  So you can easily do this if it's 1-5%, and it's very risky at 40-60% of your net worth.  As you mention, at the same time the company stock price drops significantly, you and your co-workers are much more likely to be looking for another job.

BobTheBuilder

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Re: Company stock purchase plan - How to destribute risk over time
« Reply #2 on: March 07, 2021, 03:47:19 PM »
Thank you for your input.

Regarding put options: You are right, it is at least within a grey zone. And the premium on the puts is so high, it does not really make sense. Hedging is not for free.

On the numbers: Yes, that is actually 43% ROI right out the door, looking at it from my actual net pay. And I think that is awesome! The 15% discount / 17,6% ROI for the additional stock beyond $200 p.m. is a bit lame given the lock-up duration.

Percentage-wise: Company stock is now approx. 3% of my net worth, which might climb as high as 7% just before the lock-up ends. So sticking to a max. contribution of $200 p.m. seems like the sweet spot to me, with no hedging.



MustacheAndaHalf

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Re: Company stock purchase plan - How to destribute risk over time
« Reply #3 on: March 08, 2021, 06:47:32 AM »
That sounds worthwhile (+43%) and a reasonably small portion of your NW (3%), so I think it makes sense.

Note for really volatile stocks, those with high Beta like Tesla, the discount can disappear quickly.  If you get a +43% boost but then watch a -31% drop, the discount doesn't seem as good.  So you might search for (your company) + "stock" in google, and look up their Beta on Yahoo Finance.  Tesla has a 2.0x Beta, Apple a 1.25x Beta.

pdxguy

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Re: Company stock purchase plan - How to destribute risk over time
« Reply #4 on: March 10, 2021, 12:03:12 AM »
I've participated in my employer's ESPP plan for many years and those are all good questions.

You seem focused more on managing the stock price risk, but if it's a "honeywell-like" company, their stock performance should be roughly similar to the S&P500, barring some kind of GE meltdown.

For me, the question was whether the asset concentration (and tying it to your employer) worth the likely payout? What is a competing investment alternative, and how would the risk/reward profile compare?

My "bet" was that my employer's stock would perform about as good as the S&P500, so I was buying into the investment strategy I was already going to do, but with a discount that gives you some buffer. Any volatility is just part of the investing package, it would likely happen whether invested in an index or a stock.

For company specific risk, I felt that as an employee I had a good sense how the company was doing relative to the economy and the S&P. I absolutely can confirm that the stock price is not connected to fundamental financial performance in the short run and impossible to predict.

To help diversify, taking the dividend as cash helps. 2% isn't bad! That's better than what you'd get with a bond.

Selling covered calls could be a fair amount of work for the premium, depending on the stock's volatility. You should confirm that you are allowed to sell options against the shares, given the lockup requirements. Even then, you'll have to actively manage the calls to make sure they don't go in the money and the shares get assigned, given the lockup constraints.

« Last Edit: March 13, 2021, 09:26:04 PM by pdxguy »