MSFT ESPP thoughts?

One of my college-age kids is getting an offer from MSFT and I wanted to ask here about their employee stock purchase plan. I’ve never worked for a publicly traded company so I’m not really familiar with these plans.

This is from their brochure:

The ESPP makes it easy for you to become a Microsoft shareholder by allowing you to purchase shares of Microsoft stock at a 10 percent discount. You can contribute from 1 to 15 percent of your pay (up to a maximum of $25,000 per calendar year) through regular payroll deductions. Offering periods are available quarterly, and at the end of each offering period, your total contributions will be used to purchase shares from the plan.

Is the 10% discount a good enough enticement to DCA into this stock? I owned MSFT for a few years before 2000, but sold it (dumb luck) before everything crashed and I have not owned it since. As a Berkshire shareholder the stock looks super expensive to me now at a glance, but I readily admit I don’t know how to value it. My kid has a pretty good bit of Berkshire stock already (for a 21 year old that is), so the thought of DCAing into MSFT doesn’t sound crazy to me.

It looks like shares are only purchased quarterly, and I’m not sure what to think about that. Seems like monthly would be better to DCA into a stock but maybe quarterly isn’t a big negative?

One of my college-age kids is getting an offer from MSFT and I wanted to ask here about their employee stock purchase plan. I’ve never worked for a publicly traded company so I’m not really familiar with these plans.

ESPP are a great way to get into your company stock. Typically these run every 6 months, and they take the lower of the share price at either the start or end of the period and allow you to buy at 10% discount. So its really a no-lose situation since you can typically sell the shares right away (or even better hold them for a long period of time).

tecmo

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Is the 10% discount a good enough enticement to DCA into this stock?

Hell yes. If you don’t like the stock, you can turn around and sell for a 10% profit.

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Yeah that’s what I was thinking. There might be some selling restrictions I don’t know about, but that 10% sounded interesting.

Thanks

Is the 10% discount a good enough enticement to DCA into this stock?

I think it’s usually 10% of the lesser of the beginning and ending price. So it may actually be more than 10%.

That’s not what you do with these plans. What you do is contribute as much as you can, then when the shares show up in your account, transfer them to your “regular” broker.
And then sell them.

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That’s not what you do with these plans. What you do is contribute as much as you can, then when the shares show up in your account, transfer them to your “regular” broker.
And then sell them.

What are the tax consequences of doing that short term trading? Can distributions be rolled over to an IRA to defer the taxes?

So you wouldn’t accumulate the stock over say, 10 plus years? Is that because of the current valuation of MSFT, or because it’s not wise to tie up too much of your portfolio in your company stock?

I guess the longer you hold it the effect of 10% discount diminishes.

Yeah that’s what I was thinking. There might be some selling restrictions I don’t know about, but that 10% sounded interesting.

I doubt there are; typically the shares are transferred directly. Sometimes there are taxes that are withheld.

Its really a no-lose proposition - ie: no reason not to maximize the amount you put in (typically capped). Also a nice way to force savings.

tecmo

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What are the tax consequences of doing that short term trading? Can distributions be rolled over to an IRA to defer the taxes?

You pay ordinary income tax.
No.

Think of this as a 1.5% bonus. 10% of 15% of your salary.

So you wouldn’t accumulate the stock over say, 10 plus years? Is that because of the current valuation of MSFT, or because it’s not wise to tie up too much of your portfolio in your company stock?

It is generally recommended to not invest in the company you are employed by.

I did this (transfer the stock and then sell it) every 6 months at Motorola. People that kept the stock lost a lot of money. And then they got laid off.

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Just take it. MSFT is one of the big legacy tech company to still offer it. Don’t think twice. If nothing you are earning 10% on the money you defer.

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OH BTW, Congratulations to your Kid.

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Thanks. He’s excited.

Several years ago, my wife worked at a company that offered a similar program for up to 100% of her paycheck. I thought the discount was so juicy that I told her to only work to purchase the Company stock. It ended up fairly well, but she received a rather amusing call from HR asking her if she was doing any budgeting – they were trying to explain to her that she would have a pay check that literally netted to zero.

Funny :slight_smile:

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I would not consider that Microsoft is in the same financial condition as Enron was, but I would not normally invest in the company I worked for. Let us say my salary is my major source of income. Why would I also make it the source of my investment income as well? Not good diversification, IMAO.

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Yeah that’s what I was thinking. There might be some selling restrictions I don’t know about, but that 10% sounded interesting.

There should not be any restrictions. Also as RayVT mentioned the discount may be even bigger.
From bitter experience, it is better to turn around and sell immediately. the broker usually offers to subtract the taxes from the proceeds.
There is another class of shares - RSUs or restricted share units iirc - that do vest over time. Don’t know if Microsoft gives those, or gives call options which also typically vest over time.

I’m familiar with ESPPs. The MSFT plan is a little different than others I’ve seen. Based on what I could find with a bit of web searching, it looks like you’re right - the employee can purchase every 3 months at a 10% discount to the closing market price at the end of that purchase period. Presumably the shares can then be sold at market open the next trading day, so there is some minimal risk of an overnight gap down, but for a company like MSFT that seems easy enough to bear.

The absolute ROI of a single 3-month investment would be 11.1% if the price doesn’t move overnight. For every $9 you contribute, you get $10 in return; (10-9)/9 = 11.1%.

The important thing to realize is that you only need to do this once, and at that point you can just reuse the “same” money, and do it 4 times a year.

So to make the numbers easy, suppose your son has a salary of $100,000, and decides to contribute the max of 15% of that salary toward this ESPP. If paychecks are issued twice a month, with 24 pay periods per year, that would mean $625 out of every paycheck ($15,000 / 24 = $625) going to this plan. That would come out of his after-tax money, so it would be $625 less than he would otherwise take home. After the first 3 month period, he would have contributed $625 * 6 = $3750 to the plan. That money would then be used to buy MSFT stock, which he could sell the next day for an 11.1% return, barring overnight price movement.

The value of the sold stock would be ~$4167, so he’d have a gain of $417.

At that point, he can pipeline that original $3750 investment back into the program - at least in terms of moving numbers around on paper, anyway - in practice it will still come out of his paycheck, but he’ll have the same money already in the bank, so it won’t be any further investment on his part. Just that first period of setting aside $3750 to prime the pump. Going forward that $3750 investment would spin off $417 every quarter if he just sells the day after purchase.

So for an initial investment of $3750, he would have a gain of around $417*4 = $1668 every year, or a 45% yield. Seems like a pretty good deal to me. Of course, there are taxes to pay, and paperwork to do at tax time. But it is a nice little boost of ~1.7% to his salary overall.

If he prefers to use the ESPP to accumulate stock rather than use it as an income boost, ESPP would also outperform DCA. It basically is a form of DCA if you hold the shares, but with a 10% discount applied to the purchases.

Rob

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“So for an initial investment of $3750, he would have a gain of around $417*4 = $1668 every year, or a 45% yield. Seems like a pretty good deal to me. Of course, there are taxes to pay, and paperwork to do at tax time. But it is a nice little boost of ~1.7% to his salary overall.

If he prefers to use the ESPP to accumulate stock rather than use it as an income boost, ESPP would also outperform DCA. It basically is a form of DCA if you hold the shares, but with a 10% discount applied to the purchases.“

Seems like a sweet option to me and estimated 34% yield After tax! However I would be Very tempted to just accumulate at discount in the current landscape given it is MSFT especially if he plans on staying/ holding 3-5 years. Could always sell half and keep half.

Congrats and let him know a lot of us are jealous of this benefit! :slight_smile: Please keep us posted on his decision.

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Why would I also make it the source of my investment income as well
You don’t have to own the shares, you can sell them as soon as you get to buy at the end of the period. Just treat it as the payroll deferral is earning 10% interest.