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.