American Express Co the global credit card and travel services company, on Tuesday said it will spin off its personal finance unit in a move intended to boost profitability. The New York-based financial giant said it will distribute all shares of American Express Financial Corp, which operates the American Express Financial Advisors unit, to shareholders in a tax-free transaction during the third quarter.
Shares of American Express rose to $54.82 in premarket trade on the INET electronic network, up from a close of $53.35 on Monday on the New York Stock Exchange.
American Express said splitting off the business will improve its own profitability. The company raised its return on equity goal to a range of 28 percent to 30 percent, from the current range of 18 percent to 20 percent and affirmed its current dividend payout.
American Express Financial Advisors, which sells financial planning and advice services, money management, insurance and annuities, earned $700 million last year on about $7 billion of revenue.
Financial terms of the spin-off have not yet been determined.
American Express said it will provide additional capital to the personal finance unit to boost cash levels, help the new company secure a strong debt rating and fund its insurance operations.
American Express said it expects to incur spin-off related expenses that could be "significant" and which will be recorded in each quarter as incurred.
Known as AEFA, the personal finance unit employs 12,000 financial advisors serving more than 2.5 million customers, $410 billion in assets owned or managed, and more than $145 billion of life insurance.
The company said the move will let the Minneapolis-based unit pursue new products, partnerships and expansion without having to compete with credit cards and other businesses for capital.
After the spin-off, American Express said it will remain the world's biggest charge and credit card issuer and operate an international network handling more than $400 billion in transactions a year. These business, plus travellers checks, travel services and private banking generated $2.7 billion of profit last year on $22 billion of revenue.
AEFA will continue to be led by James Cracchiolo as chairman and chief executive. The unit will retain rights to the American Express name for an undisclosed period following the spin-off.