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If GE Keeps It Simple, Investors Will Love Its Shares

NEW YORK (TheStreet) -- Sometimes a small piece of corporate news can have much bigger implications.

Thursday, General Electric (GE) announced the initial public offering of 20% of its North American credit card division by the end of this year. The business, which will operate under the name Synchrony Financial, specializes in offering private-label credit cards for retailers. After the IPO, GE will spin off the business in 2015 by distributing the remaining shares to investors.

That sounds worthy but, in the wider scheme of things, relatively dull, even with the Synchrony operations posting around $2 billion in profit in both 2012 and 2013. If you value that profit stream at $20 billion, that's just over 7% of GE's market cap today. That's fine but not ground-breaking in itself.

This announced spinoff, though, stands for something much more important: the continued simplification of GE's business. This is great news for investors.

When people think about GE they think about health care, aviation and energy but just over 30% of GE's fourth-quarter segmental profitability was at GE Capital. We can debate the relative attractiveness of "industrial" or "financial" divisions but the simple reality is the existence of GE Capital on the GE balance sheet is holding the GE share price back.

How is this so?

Investors like simplification. GE is far too diversified and large a business ever to be pigeon-holed as anything but an industrial conglomerate, but at least investors know that such a business -- with its mix of short and long cycle exposures -- has a natural peer group with companies such as United Technologies (UTX), Honeywell (HON) and even 3M (MMM).

But when you add nearly a third of earnings from a financial business, then investors start to worry.

Over time GE Capital has been a friend to the broader GE business, but it has hugely contributed to volatility especially (and inevitably) in the global financial crisis period a few years ago. Take a look at the relative performance of GE against the companies named above over the last six or seven years if you do not believe me.

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