My Personal Finance Journey

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2004 H1 ESPP Shares Sold @ $28.59

Contributed by mm | July 2, 2004 1:16 PM PST

You probably already know from my blog that I always sell my Employee Stock Purchase Program (ESPP) shares as soon as possible. My rationale can be summarized in three bullets.

- I want to lock in a quick, guaranteed return instead of being held hostage of a lot of company stock.
- The tax benefits of postponing gains are elusive at best, thus it is not an incentive for me to keep the stock any longer.
- I have enough exposure of my company stock thru the Employee Stock Option Program (ESOP), and if I really want to have more company stock exposure, I will buy in the 401(k) account for maximal tax deferral.

This morning, the shares from the recent January-to-June ESPP period finally become available in my online Fidelity account, so I went ahead and sell my all shares at $28.59 apiece in the first trading hour. With the ESPP discounted purchase price of $23.33, selling them at $28.59 leaving me a nice 22.5% before-tax return, or 16.9% after-tax return (I am at 25% tax bracket). It is a bit less than the 19.1% after-tax gain I enjoyed in the last ESPP period but is still a great return on an APR basis (and most importantly, it is almost risk-free).

MSFT recently sported a nice run of 10% in less than two months in anticipation of management's announcement of how the company will handle its excessive cash. While my sale today may leave some money on the table if the announcement becomes a great positive surprise to the Street (which I doubt, as I believe most of the impact is already built into the price), I will not miss the boat altogether because I still have a large quantity of vested stock options (which I am in no hurry to sell any time soon -- most of them will not expire until 2012).

Moving forward, MSFT has rewritten ESPP rules, making the program less attractive by decreasing the purchase discount from 15% to 10%, and removing the appreciated look-back feature. This adds some more risks to the program, but I will continue to participate in the program (because it still represents a huge gain on APR basis) and continue to sell the shares as soon as they become available.

I will also apply the same immediate-sale strategy to my Stock Award shares. (For people who are not familiar with this new program: it replaces the stock option programs since 2003; instead of giving out stock options, Microsoft will give out stocks with a vested schedule of five years -- the first batch of Stock Award shares will be vested in late August.) Unlike ESPP shares, Stock Award shares will be taxed immediately and Microsoft will withhold some shares to satisfy the income tax withholding requirements. This makes holding the Stock Award shares even less sensible.

I will report again once I liquidated my Stock Award shares.

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This Post Has Received 2 Comments. Share Your Opinions Too.

jason Commented on July 3, 2004

Hi Again!

Thanks for the link back to the older post, I am relatively new here and had not read your rationale for the sell on grant of the Qualified ESPP. I have a similar goal as you, minus the China location to settle, though I found it charming and lived there for a work assignment in the prior 12 months before being back in USA almost a month to now. I agree fully with your assessments of risk vs. potential tax savings! :) I guess I was kind of looking internally when commenting before. The current situation is priced into the stock, but the chart looks good and I feel a rally coming through the summer.... Granted I fear the semiconductor sector may not participate strongly in that. I also agree the incentive stock purchase items should be sold on vest. My employer likes to emulate MSFT in many ways, so I am a little scared when we begin to model ESPP and ISOs after their changes!

Still loving the site!
Figures of why I internalised the ESPP item fully:
30-JUN-2000 $ 52.79
31-DEC-2000 $ 51.05
30-JUN-2001 $ 49.24
31-DEC-2001 $ 44.03
30-JUN-2002 $ 23.34
31-DEC-2002 $ 23.37
30-JUN-2003 $ 30.61
31-DEC-2003 $ 30.55
30-JUN-2004 $ 45.84

As you can see by the downtrend it got a little scary at times, but holding through was rewarding in my case as our market value as of Friday was ~72$. That's a good case of capital appreciation and many items are now at a health long term CG situation from FMV of purchase date. I still hold due to growth forecasts in our industry and our royalty machine. The current batch was priced in at a 52 week high that was hit July 1 or thereabouts, so they probably will not be as promising as the past couple of years have been and may even be reduced by the closing date of December 31.

mm Commented on July 4, 2004

Hi Jason,

Thanks again for the comments and sharing your perspective!

I think it helps by listing some (potential) difference between our scenarios. First, Qualcomm is a great company and it should still have many years of supercharged growth ahead. Instead, 10% annual growth is a remarkable achievement at Microsoft simply because of its size. If you look back of MSFT's chart, Microsoft is still at its 1998 price range. This is not to say Microsoft is not a great company to work for (and I am still thankful for the company for making me who I am), but I see no catalysts that will give MSFT investors an above-average return in the next five years.

Second, diversification is certainly an issue of concern for me. I have a few thousand vested under-water stock options, plus more than two thousand additional options vested with a striking price under $28 every year in the next three years. Think about, say, 5,000 MSFT stock options, it is like $140,000 (at $28 apiece) working for me to capture all MSFT appreciations with no downside risk for me. The amount is not reflected in my balance sheet (because I cannot claim anything below the striking price), but at 90% of my current net worth, I consider I have more than sufficient exposure on MSFT. (Of course, it does not make sense for me to lower options holdings to have less exposure now -- they are only above water by a few bucks and will not expire in 7-9 years.) Therefore, semi-annual addition of several hundred ESPP shares is too much for me if I put it into the holistic view of my financial situation. (I suspect QCOM also gives out a handful of options, so I am not sure if you have the same problem.)

I feel it is perfectly ok if people with different expectations on the stock and different diversification needs to hold ESPP shares. Time can prove me wrong in that I fail to maximize my gain in ESPP, but I am comfortable with my choice of diversification.


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