NEW YORK (TheStreet) -- Sometimes a small piece of corporate news can have much bigger implications.
Thursday, General Electric (GE) - Get General Electric Company (GE) Reportannounced 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 Technologiesundefined, Honeywell (HON) - Get Honeywell International Inc. (HON) Report and even 3M (MMM) - Get 3M Company Report.
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.
Back in January, at the time of the fourth-quarter and full-year 2013 earnings disclosures, GE described the environment as "generally positive but still mixed," which sounds a bit confused. Fourth-quarter orders were good but pricing in three of their six industrial segments was negative. Then there were the company's 2014 views. On these, "value" is hoped to be a positive, while "mix" is a negative.
What was the big double-positive factor? "Simplification." GE management get the logic.
GE shares today trade at a prospective P/E discount to those of United Technologies, Honeywell or 3M. If you put the company's industrial units on similar multiples to these other industrial conglomerate peers you get a value about 90% of GE's current share price.
If GE is successful in creating value equivalent to around 7% of its current market capitalization via the Synchrony Financial IPO and spinoff route, then the remaining assets at GE Capital are currently valued at a very low level. Who knows? Removing a business which in 2013 contributed just under a third of GE Capital's profits may inspire GE to simplify some more.
Here's the final observation. During 2013, GE took a first step at simplifying its business via the sale of the NBCU joint venture stake. The receipts from this sale helped boost free cash flow (post any acquisitions) for 2013 overall to $17 billion.
How was this used? Nearly $8 billion was given in dividends and just over $10 billion given back in a buyback. That is in aggregate the equivalent of over 6% of the current market capitalization back to shareholders, which is attractive in this low-yield world we live in today. That's the power of simplification.
In the $25 range, GE shares look attractive to me.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.