Should I Continue Participation in the IBM ESPP?
Ever since I started working at IBM I have been contributing to the IBM ESPP plan. If your not familiar with ESPPs (Employee Stock Purchase Plan), it is a company plan to encourage stock ownership among employees. Many large publicly traded companies including Microsoft and Capital One offer similar plans.
Up to last year, IBM's ESPP was a great benefit to employees. A participant could make up to a 10% payroll deduction to the ESPP. The price that a participant paid for the stock is the stock price at the time they started contributing (reset every 6 mos), or the stock price at the time you purchased the shares (whichever is lower) with a discount of 15 percent off the lower stock price. Either way, the participant buys the stock at a price that's lower than the current stock price.
However, this year IBM made significant revisions to the IBM ESPP. The plan has changed so that the purchase price is simply 5% off the current stock price. My understanding is that these changes where made to help IBM meet the new accounting changes to report stock option expensing.
While a 5% discount is still nice, a large part of this benefit has been wiped out. I have continued to participate through this year because as an investor I believe IBM's stock price was undervalued and had very little downside risk. However, IBM's stock price has rebound slightly, and should IBM's stock price continue to move up, the downside risk outweighs the 5% discount.
At the end of the current period (Dec 31) I am considering withdraw of my participation until I feel IBM's stock is a more attractive investment. After each period I plan to assess the potential of IBM stock as I would any other potential investment and if I think IBM would be an attractive investment I would consider enrolling in the IBM ESPP again.
Up to last year, IBM's ESPP was a great benefit to employees. A participant could make up to a 10% payroll deduction to the ESPP. The price that a participant paid for the stock is the stock price at the time they started contributing (reset every 6 mos), or the stock price at the time you purchased the shares (whichever is lower) with a discount of 15 percent off the lower stock price. Either way, the participant buys the stock at a price that's lower than the current stock price.
However, this year IBM made significant revisions to the IBM ESPP. The plan has changed so that the purchase price is simply 5% off the current stock price. My understanding is that these changes where made to help IBM meet the new accounting changes to report stock option expensing.
While a 5% discount is still nice, a large part of this benefit has been wiped out. I have continued to participate through this year because as an investor I believe IBM's stock price was undervalued and had very little downside risk. However, IBM's stock price has rebound slightly, and should IBM's stock price continue to move up, the downside risk outweighs the 5% discount.
At the end of the current period (Dec 31) I am considering withdraw of my participation until I feel IBM's stock is a more attractive investment. After each period I plan to assess the potential of IBM stock as I would any other potential investment and if I think IBM would be an attractive investment I would consider enrolling in the IBM ESPP again.
Comments (13)
DATE: 12:34 PM
ESPPs are a tough call for me. My company's plan is similar to the way IBMs was before the change. However I have only minimally participated. My rationalization (whether good or bad) is that I'm already dependant on the health of my company for so much. I would rather diversify than put all my financial eggs in my company's basket.Taxes are another consideration, and increasing my 401K contribution with money I would have put in the ESPP helps me out as well. You mention that should IBM's stock price continue to move up, the downside risk outweighs the 5% discount. But if the stock price continues to increase, you would also receive a nice return on your money as well--two ways of looking at the same thing, both valid. I think your evaluation of this as any other investment is the best approach.
Posted by Chrees | September 10, 2006 3:05 PM
DATE: 1:18 PM
How long do you have to hold the stock? Can you sell it right away? Can you sell other shares of IBM stock that you have which have already vested? Can you open a brokerage account and short-sell IBM shares equivalent to the number you would receive? (be careful about how much the stock borrow fee is, though)
Posted by Anonymous | September 10, 2006 3:05 PM
DATE: 1:28 PM
I also work at IBM and have been wondering the same exact thing as of late. I know that a lot of people I work with sell their shares from ESPP each year and then invest that in other things (obviously a better proposition when we were getting the 15% discount). Now, I don't know if that is worth it.I will be watching this carefully for other ideas on what we should do.-Rick
Posted by Anonymous | September 10, 2006 3:05 PM
DATE: 1:56 PM
I work for a company that is still offering the 15% discount on their ESPP. I know employees that are selling the shares immediately once they have been purchased. This ensures the 15% gain but then you need to pay the short-term capitol gains. So if you are hesitant due to the reduced discount and possible stock changes, you could still use this buy/sell method and get the immediate gains.Neo
Posted by Neo | September 10, 2006 3:05 PM
DATE: 1:58 PM
Neo...I believe we get booted from the program until the next offering if we sell immediately.-Rick
Posted by Anonymous | September 10, 2006 3:05 PM
DATE: 3:14 PM
chrees - good points - lucky for you, your plan hasn't changed. What I meant was if IBM's stock price continues to moves up, strictly as an investor, I would feel the stock was more fully valued, presenting more downside risk (IMO) from an investment perspective. Ricks right - if we sold the stock immediately we couldn't participate for the rest of the period or the following period.Under the old plan it was such an easy decision for me - I could buy stock with an immediate 15% discount (or more) off the stock price and then turn around and sell the stock in 6mos or less. It was a very profitable move, even after tax considerations (although I guess there would be scenarios where I would lose money over the period, but it was a risk I am willing to take for the potential profit).However under the new plan, once you begin to take into tax considerations and the fees - the 5% discount doesn't really present this as a very profitable move.
Posted by 2million | September 10, 2006 3:05 PM
DATE: 7:02 PM
once you own the stock find out what the minimum holding period is. buy PUTS with that expiry to prevent loss in case of downward movement.You could sell covered calls too.
Posted by Empty Spaces Inc. | September 10, 2006 3:05 PM
DATE: 11:23 PM
Empty Spaces Inc. Good idea about the puts order. Good post to you 2million. Relevant and practical. thanks
Posted by http://financenstuff.blogspot.com/http://financenstuff.blogspot.com/ | September 10, 2006 3:05 PM
DATE: 5:25 PM
The company I work for just changed their ESPP the same way IBM did - it's still a 15% discount but it is now only the price at the end of the purchase period, not the first and last.Also, the company has a specific policy against employees engaging in any hedging activities against the company stock - so that means no puts, no coverted calls, no options.I will be withdrawing from the ESPP in April when this offering period ends (the last period under the old rules) and investing my money elsewhere.
Posted by Anonymous | September 10, 2006 3:05 PM
DATE: 1:13 PM
Interesting. I never heard of a company having a specific policy against hedging the company stock. To the best of my knowledge IBM doesn't have a policy like that.
Posted by 2million | September 10, 2006 3:05 PM
DATE: 6:49 PM
I am working with one of your major competitor. We also have ESPP at 15%.Recently, they have changed our stock option plan but left the ESPP unchanged. I am thinking it is only a matter of time that will be removed too.The stock option gravy train, as I know it, will be history.
Posted by Anonymous | September 10, 2006 3:05 PM
DATE: 6:33 PM
Take the 15% immediate gain and run with it.I worked for a company that went IPO, and the ESPP allowed many people after the IPO to make double what their post-IPO stock was worth -- 15% is hard to beat (assuming you can sell it immediately like we could)5% sucks.
Posted by Anonymous | September 10, 2006 3:05 PM
5% is still okay. I work for Disney who offers a ESPP, but offers no discount off the stock price. What's the point? Absolutely no benefit for employees
Posted by zm | August 3, 2008 8:21 AM