A smart grid duo

These 2 stocks provide a way to invest in the long-term growth of the segment.

By TheStockAdvisors Sep 16, 2013 1:45PM
 Power lines (© Digital Vision)By Richard Stavros, Utility Forecaster

Not long ago, energy utilities had slow and cumbersome methods to determine how and when their customers used their product; that's all changing with the smart grid revolution. This development is giving utilities in the U.S. and overseas more clarity on their customers' usage, as well as the ability to send price signals and other information to more efficiently manage their systems.

While there have been pure-play technology companies in the smart grid segment that took early ground in the space, larger, more diversified ones -- such as Honeywell International (HON) and Emerson Electric (EMR) -- have been gaining ground.

And unlike many technology companies, these two pay handsome dividends, and energy systems and technology predominantly drive earnings as part of their portfolio of diversified businesses.

Honeywell has been a steady player with its Automation and Controls division. In the second quarter the company generated sales growth of 3% on both a reported and organic basis. And Honeywell has produced a strong return on equity of 23.9%.

Among its many projects, the company is working with the Tianjin Economic-Technological Development Area (TEDA) to implement China's first smart grid demand response project.

As part of the project, Honeywell will install its automated demand response (Auto DR) technology at select government, commercial and industrial facilities in Tianjin.

The technology will allow TEDA and network operator State Grid Corp of China to automatically adjust energy use to reduce demand on the electrical grid, helping avoid potential brownouts and blackouts. In fact, China is one of the fastest-growing areas for smart grid adoption.

Emerson Electric designs, supplies and delivers products, technology and engineering services and solutions to industrial and commercial customers.

Orders picked up during the second quarter, indicating the macro-economy is improving. Sales for the company's Process Management division, which creates systems to optimize power plants, grew 3% year over year to $2.2 billion.

Weak demand in the U.S. and Europe was largely offset by an 8% sales increase in Asia.

In fact, underlying orders jumped 8% in the segment, and order growth in China registered 13%. Management noted that order trends in North America are positive thanks to energy projects under development.

Between power infrastructure and systems, these firms are poised to capitalize on the fundamental needs of future populations and businesses today and in the future.

Honeywell currently yields 2%, with a low payout ratio of 40%. Emerson currently yields 2.6%, with a payout ratio of 79%.

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