Redundant - Sell or hold employer shares?

Temrael

Hi all,

I'd rather not name my employer if that's ok, so if you work it out from my post please respect that (but award yourself 10 points for being a clever cloggs).

I'm being made redundant soon and have some shares given to me by my employer (in a SIP) and some share options in an SAYE scheme (at a heavily discounted rate). The company were a very recent IPO and whilst there has been some lumps and bumps along the way, the share price has done really well (up around 40% in a year).

From everything that I've read, due to the redundancy, it looks like I could sell the shares or transfer them to my ISA without an NI/Income Tax penalty and there's not enough to worry about CGT, about £8k (all in, not profit).

I'm a bit torn about what to do though...

Reasons To Sell

• The shares have already achieved a good return, it makes sense to cash out "while I'm ahead".
• The company has a fair amount of debt and so whilst their potential revenues look good the share is seen in some quarters as overvalued, so they could drop a fair amount if investors become more concerned about that over time.
• I'm a Passive investor by nature, everything else is in Index Trackers (Vanguard LS 80). I could sell these shares and move the cash to Index Trackers (maybe not in one lump sum).
• I would be unlikely to go and buy any other single share, why continue to hold this particular one longer than I have to?
• Psychologically, it might be nice to just cut all ties to the old place, and "move on" with my life.

Reasons To Hold

• Their market share means they have all but a monopoly on their sector and the share is therefore seen by some as potentially "...the next Rightmove" i.e. a very high potential upside.
• They have a track record for great financial performance year after year.
• I don't need the money in cash, I've got too much already if I'm honest (but have been happy to secure bombproof 6%, 5%, 4%, 3% returns in a myriad of current accounts).
• It would only represent less than 10% of my portfolio so I could afford for them to have quite a wobble.
• It might be "fun" to have something a bit more speculative in my portfolio.
• As they won't be my employer soon, I don't have the "eggs in one basket" situation of having my job security and investments tied up in the same company.

I'm of course free to sell some and hold some so it's not an either/or decision. I could sell the SAYE shares for example (as they are made up of my savings) but hold the ones awarded to me free (as they don't "owe" me anything).

Obviously I appreciate none of you will be able to tell me what to do, but I more wondered... what you guys would consider when weighing up a decision like this? What would be the important things to focus on in making the decision? What would and wouldn't you factor in?

Interested in your thoughts...

AnotherJoe

I'd consider why they were making people redundant and what that said about their future prospects, something I don't see in your list of factors. if they have a a monopoly and such bright prospects why are they getting rid of people?

Unless it's not "real" redundancy but genuine restructuring or a mechanism to edge you personally out, I would consider it didn't bode well and would sell. few companies that start making redundancies end up doing well.

Another way of looking at it. If you hadn't worked for them, and didn't have these shares, would you buy them now ? So, remind me why you would keep them ?

Temrael

Thanks for that, I joined following the acquisition of a tiny company that has now been fully "absorbed", our whole office was closed. So yep, restructuring I guess.

I'm out of a job but the company is very healthy.

Temrael

AnotherJoe wrote: »

So, remind me why you would keep them ?

See my "Reasons to Hold" above really. I was all set to come down on the side of simply cashing out and just funding my other passive investments but then I made the mistake of looking at the 5 year Rightmove graph!

It feels a bit tempting to go, at least in a small way, for something that is more speculative, particularly when (due to the heavy discounting of the share options) I am cushioned a little bit of volatility.

My head says just cash out though.

AnotherJoe

Temrael wrote: »

Thanks for that, I joined following the acquisition of a tiny company that has now been fully "absorbed", our whole office was closed. So yep, restructuring I guess.

I'm out of a job but the company is very healthy.

No offers to move within the company? If they are doing so well wouldn't you want to work for them?

Temrael

AnotherJoe wrote: »

If they are doing so well wouldn't you want to work for them?

Their office is 250 miles away, so no, not really.

AnotherJoe

Then I think it comes down to, given what you know about the company would you buy these shares as a punt now? You may feel you have perhaps more inside knowledge of this company than many outsiders?

If you wouldn't buy them, you should sell them. What you paid for them is psychological backup (eg if they drop by say 20% you can tell yourself you are still in the black) but irrelevant from an investment POV.

Thrugelmir

How large a share of your total investments does this company represent? That's a factor I'd consider. Likewise whether it is worth paying off debt instead or boost pension provision.

OldBeanz

No idea who you work for but think of employees in Tesco, Bank of Scotland/Halifax, Royal Bank of Scotland, Lloyds, and no doubt others who thought they were holding blue chip shares ten years ago. Diversify.

bowlhead99

I would sell most of them. 'Less than 10% of my portfolio' is still a lot for a single share because nobody should hold only ten companies. Whereas one company at 3-5% plus another 20-30 companies at 3-5% (or ideally some broad-based funds or trackers), is much better. You can still have 'fun' with seeing how a thousand pounds of shares ended up performing but if they tank it is a lot easier to bear than if you had loads of them.

I could sell the SAYE shares for example (as they are made up of my savings) but hold the ones awarded to me free (as they don't "owe" me anything).

While I agree with the idea of selling some and keeping some, make sure you forget that psychological BS. The share certificates don't know what price you paid for them and neither do the directors of the company. They don't have a corporate objective of aiming to deliver a specific percentage return against your personal buy price or to make sure you at least break even. So, please forget the 'history'

Yes, some of the shares came from your monthly 'savings' out of the salary that your company agreed to give you for going to work, and other shares were shares or options that the company agreed to give you for going to work. So, well done, you went to work and now you have shares. But those shares are all the same as each other and all worth the same price and you've said there's no specific outstanding tax consequences of selling any of them this year.

So it is like having a few open containers of paperclips on your desk or a few half-used bags of charcoal briquettes by your barbecue that you've accumulated over time. If your neighbour comes round and says can he borrow a paperclip or a lump of coal, you don't go thinking about whether you should give him an expensive one or a cheap one - it's just one big pile, right? So to say that some of the shares are better than others or less risky or more rewarding than others, is a complete nonsense.

Psychological tricks are bad because they can encourage you to hold onto shares that you shouldn't out of blind faith or loyalty:

- so the ones you got free are now trading at 30p instead of 300p - you think, "but they could drop to 1p and I'd still be in profit, so it's fine" and you fail to react to the warning signs that they might drop to 1p.

- or the share price is 300p and the company starts going down the toilet, and then it pauses for a while at 190p, but you bought the shares at 200p via the savings program so don't want to sell out until you at least get back up to break even, and then it does go back up to 200p but you don't cash out now because you know it was once at 300p, so you hang on a bit to see if it recovers that, and then it drops to 190p, but you want to break even so hold on again, ignoring the warning signs, and this time it never goes back up to break even and finishes at 1p.

So, with investing you should always forget emotions and assess the situation as if you were in the third person. That still counts if you sell out too: don't exit the shares now and spend the proceeds on investment ABC, and two years later fail to worry about what happens with ABC because "well, I got that with my free money from when I worked at XYZplc".

You outlined a few good reasons to sell. Let's just look at your reasons to hold:

Their market share means they have all but a monopoly on their sector and the share is therefore seen by some as potentially "...the next Rightmove" i.e. a very high potential upside.
They have a track record for great financial performance year after year.

Much of the potential upside of the company's financial position and its historic performance is in the price already. They had good performance and a high potential upside when they IPO'd. Now they have been in the public markets for a year or two, the market has decided their worth. If the market thought they should be at £20 a share or £200 a share, that's what their price would be, and presumably it isn't.

Also, the market is fickle and can be very demanding. If they have a great history of growing turnover 30% a year, and next year they put in a good performance and grow by 20% a year, the market will say that the 'growth is moderating', 'the product has reached saturation and is now ex-growth', 'the dream is over' and all the people who were hoping to get a 10-bagger on these shares will run for the hills, and the share price might drop by 50% - even though they just announced that they grew revenue by 20%.

As an analogy, look what happened to the price of emerging market funds and the chinese stockmarket in recent years: "Hmm, China's growth this year will be 6-7% which is triple what we'll see in Europe and the US. Still, it's not 10% like it used to be, so let's pull our money out and abandon the sector, because the billions we were investing was on the hope that we'd get double digit returns".

So, not a great reason to hold. There are any number of other companies around the world which have solid records of improving financial performance and have a decent or dominant position in their sector. Many of them will at some point lose that dominant position with a catastrophic effect on their valuation.

I don't need the money in cash, I've got too much already if I'm honest (but have been happy to secure bombproof 6%, 5%, 4%, 3% returns in a myriad of current accounts).

So when you sell out, don't leave the money in cash. But that is not a 'reason to hold' a large position in a single company operating in a single industry. There are thousands of other companies or funds to buy.

It would only represent less than 10% of my portfolio so I could afford for them to have quite a wobble.

Again this is not a reason to hold something. That's just saying you can afford to take a loss on your investment whatever the investment happens to be - it doesn't tell you what your investment should be!

There are ten thousand other companies out there. You could afford to pick your favourite ten out of the ten thousand and put £800 in each, and then if one of them had a wobble and imploded you would only lose £800 instead of £8000, but overall you are getting the average returns from your favourite 0.1% of companies in the world.

What, you haven't evaluated the other 9999 companies in the world to know which the best ten are? So how do you know the one you picked is even in the top half of the 10,000? And even finding a 'top quartile' performing company in the UK, might be worse than a 'bottom quartile' company in another country.

It might be "fun" to have something a bit more speculative in my portfolio.

You could have something speculative in your portfolio like a fund that only invests in Vietnamese companies. Or a fund that only invests in Biotech companies. It becomes very speculative if you want a fund that invests in Vietnamese biotech companies. It becomes very very speculative if you want to put 10% of your portfolio in one vietnamese biotech company.

So, while you are not considering a single vietnamese biotech company you are considering a UK company in the abcxyz sector. To an alien visiting planet earth and wondering what to invest in, who did not have an emotional tie to a former employer and had free rein to invest in whatever they liked, they would likely not understand why one should pick from the abcxyz sector on the London Stock Exchange over the defghi sector in New York or jklmno sector in Toronto or pqrstu sector in Ho Chi Minh.

As they won't be my employer soon, I don't have the "eggs in one basket" situation of having my job security and investments tied up in the same company.

That's not a reason to hold a single share, let alone £8k worth of shares, in this company. If I had the time and the inclination I could list 10,000 global companies in which you could invest without having your job security and investments tied up in the same company.

Yes, investing in your employer is a 'classic' eggs in one basket situation that people should avoid where possible. Still, you are trying to list 'reasons to hold' that company and avoid buying a more diversified investment which is your alternative option. To me, it's not particularly compelling if the best thing you can say is "hey, at least it's not a classic eggs in one basket situation! It's just a regular eggs in one basket situation!"

Bottom line, I would be selling most of the shares. Whether you keep 10% or 25% or 33% of them for speculative purposes is up to you, but you certainly don't need to keep them all.

In terms of recent IPOs, there's an example I invested in a couple of years ago, Just Eat. IPO'd in April 2014 at 260p. I bought in a little later a bit lower. By May 2015 they were almost 500p and making the right noises about organic growth and acquisitions. Maybe you could imagine someone getting made redundant having been taken over by them and thinking, hmm, the share price is up very healthily from IPO, the revenues keep increasing year on year, this company is going places, I should definitely stay invested (and ignore the fact that he company is being valued at 80-100x forecast earnings).

But by this February the price had fallen back about 30%, and although it's improved a bit since, it's still only around 380p. They are one of two dominant players in my part of town but by now all the restaurants have heard of them and decided to use them (or not) and the customers have heard of them and are using them (or not) and so it would be relatively difficult to more than double their revenues in my town next year like they would have easily done in their first couple of years. There are of course new towns to go into, but they already started with the big ones.

So, a dominant position and fast growth does not guarantee you make profits enough to continue to justify your share price, and a person leaving that company who got paid off in shares this time last year and kept them probably isn't feeling too clever. He might get rewarded long long term, but that's the same with literally any investment on the planet.

george4064

Thrugelmir wrote: »

How large a share of your total investments does this company represent? That's a factor I'd consider. Likewise whether it is worth paying off debt instead or boost pension provision.

This.

I would stick the shares in an ISA, sell the lot and re-invest the money into my existing portfolio (in your case Vanguard LS).

p.s. I'm pretty sure I've worked out who the company is