In stock sale, Google’s Eric Schmidt sees patience pay off

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Google's (GOOG) NASDAQ stock price over the past year.
Google’s stock price over the past year.

Google Executive Chairman Eric Schmidt will soon sell 3.2 million shares of Google stock, worth perhaps $2.5 billion and well over a third of his 2.3% equity share, according to a Feb 8. regulatory filing.

Investors looking for divine insights about the tech company from Schmidt’s sale will probably be at a loss. The plan to sell the stock, beginning within 30 days and continuing throughout the year to avoid affecting the company’s stock price, was agreed to in November 2012. It is part of Schmidt’s “long-term strategy for individual asset diversification and liquidity,” the filing says, and Google has assured reporters that he remains committed to the company.

It makes sense that Schmidt, 57, doesn’t want to have $6 billion of his reported net worth of $7.5 billion tied up in a single company, even if it is the internet juggernaut he helped build as CEO for 10 years. But what is interesting here isn’t why Schmidt will sell the stock, but how he’ll do it—using what’s called a “10b5-1 trading plan,” which refers to a SEC rule used by corporate insiders to avoid charges of insider trading when they make big sales like this one.

Essentially, the plan certifies that the decision to sell stock occurred when the owner wasn’t in possession of any pesky “material non-public information”—business secrets—that would give her an unfair advantage in the markets. By planning the sale ahead of time, they can make plain that there’s no funny business. The long waiting period between the adoption of the plan, its announcement and the beginning of the sales suggests that Google and Schmidt are being cautious when it comes to allaying suspicions of double-dealing.

In the last quarter of 2012, when Schmidt and Google were finalizing the plan to sell stock several months down the road, most other executives were plotting how to sell stock or issue dividends immediately, to avoid the tax increases on capital gains and dividends that were widely expected and ultimately enacted as part of a fiscal consolidation plan agreed to by President Obama and Congress. Selling beforehand was a lucrative move: Long-term capital gains booked in 2012 were taxed at 15%, but in 2013 they’ll be taxed at 20%, along with a 3.8% surtax implemented by the 2010 health care reform law.

Schmidt didn’t save that money, even though a waiting period of as little as 10 days can be used by a 10b5-1 plan. Theoretically, he could have begun selling in 2012, saving at least some tax income, though a year-long sales plan would have resulted in at least some of his income falling under the new tax rates. The wait is notable, since Schmidt has famously defended Google’s practice of avoiding corporate income taxes by booking profits abroad, telling Bloomberg “it’s called capitalism. We are proudly capitalistic. I’m not confused about this.”

But the delay isn’t likely to cost Schmidt any money. Google’s stock has performed strongly since he came up with the plan, rising some $140 dollars, a 22% increase. Assuming that price stays steady or continues growing over the next year, it will more than make up for any extra taxes he will have to pay by waiting to sell. Who says there’s no such thing as good karma?