Employee Stock Purchase Plan (ESPP) - Immediate Selling Strategy

An almost fool proof strategy for ESPP shares is to opt for selling them immediately after the plan purchases the allotted shares. This “almost” guarantees a return of 17.65% on the money invested which when annualized brings the return figure to 98%. It is not a 100% guarantee only because there is minutely small chance that the company stock could slide significantly on the day it was purchased and before one is able to sell them. Almost guaranteed annualized-return of 98% is still an outstanding investment option. Below are the details of the return calculation.

17.65% return calculation:

The company stock is purchased at a 15% discount – the discount rate that is largely standard for ESPP plans. For e.g., $100 worth of stock purchased for $85 earns a profit of $15 on the $85 that went in. So, the percentage return is:

15*100/85=17.65%

98% annualized return calculation:

The $85 is deducted from the paycheck over a period of 6 months using semi-monthly payroll deductions. An amount of $7.08 ($85/12) is deducted from the paycheck every pay period and at the end of 6 months, stocks worth $100 are purchased which on immediate sale realizes $100 cash. The XIRR function in Excel (might need to install the Analysis options package to get it to work) allows to calculate the internal rate of return for such a schedule of cash flows. Below is an example that uses the function over the first 6 months of 2007:

=XIRR(
{-7.08,-7.08,-7.08,-7.08,-7.08,-7.08,-7.08,-7.08,-7.08,-7.08,-7.08,7.08,100},
{"1/15/2007","1/30/2007","2/15/2007","2/28/2007","3/15/2007","3/30/2007",
"4/15/2007","4/30/2007","5/15/2007","5/30/2007","6/15/2007","6/30/2007",
"7/1/2007"}
)

The formula above yields a whopping 98% annualized internal return – the first array represents the cash flows – the first 12 values represents the semi-monthly payroll deductions of $7.08 and the last value in the array represents the $100 realized after selling the purchased stock. The 2nd array represents the actual dates when each cash-flow event in the first array happened.

Taxes and commissions will take its due out of this return. The commission however should be minimal on a percentage basis, especially when participating at the maximum allowed limits ($25000/year). Ordinary income taxes will be due on the gain, but the almost guaranteed return should be well above any other option with a similar risk profile that is available…

Related Posts:

1. Flexible Spending Accounts (FSA) – Great Benefit with a few caveats!.
   
2. Writing Covered Calls against Employer Stock Plan Shares (ESPP, Restricted Stock, and Stock Options) – A Primer.
   
3. Employee Stock Purchase Plan (ESPP) and 401K Retirement Plan Annual Enrollment and Contribution Review.
4. Employee Stock Purchase Plan (ESPP) - Immediate Selling Strategy.
   
5. Realizing Long-Term Capital Gains With Stock Based Compensation.
6. Stock Based Compensation Tax Optimization Strategies.

Last Updated: 01/2015.