American industrials have enjoyed a strong recovery as the domestic economy has improved. Industrial production has reached pre-financial crisis levels due to greater capital spending and increased exports driven by a weak US dollar.

Small- and mid-cap industrials have performed especially well in this environment, particularly those that operate in the global market. While Europe is clearly slipping into recession, emerging market demand has been a powerful trend over the past year, particularly for capital goods necessary in both the energy and home construction sectors.

A.O. Smith (N YSE: AOS) and ITT Corp (N YSE: ITT) are both mid-cap, US-domiciled industrials that have been significant beneficiaries of these trends. Additionally, both pay modest dividends, which makes them quintessential growth and income plays.

Building Boom

A.O. Smith is an unlikely success story in the wake of the col- lapse of the US housing bubble.

As the largest manufacturer of water heaters in America, A.O. Smith holds a 40 percent share of the US residential water heater market. While the company also manufactures equipment for the commercial market, about 60 percent of its sales are tied to the US residential market. Although sales dipped following the housing bust—falling from a peak of $2.3 billion in 2007 to a trough of $1.5 billion in 2010—they held up better than expected due to replacement sales.

The company has also benefited from its decision to expand its presence in China, where its sales have grown from less than $50 million in 2003 to around $300 million last year. And the Chinese government’s latest five- year plan has created additional upside opportunity for A.O. Smith by ordering construction of 36 million new affordable housing units.

Despite the company’s rapid expansion, it has just $443 mil- lion in long-term debt and more than $463 million in cash on the balance sheet, with a debt-to- equity ratio of just 0.3. Addition- ally, earnings are expected to grow from $2.39 per share last year to about $2.80 per share this year, as sales grow 15 percent to 20 percent. Beyond that, the company currently pays a quarterly dividend that has consistently grown over the past decade, with a payout ratio of just 23.6 percent and the potential for further dividend growth.

Yielding 1.4 percent, A.O. Smith offers a moderate amount of income and attractive growth potential.

Breakup Value

In recent years, companies have shifted away from operating as unwieldy conglomerates in favor of breaking up disparate businesses in order to refocus on core competencies and unlock shareholder value.

ITT, which split into three parts last November, is a prime example of this trend. The company’s water business became Xylem (N YSE: X YL) and its defense operations became Exelis (N YSE: XLS). The legacy IT T component retained the former conglomerate’s core industrial assets, including aerospace and automotive operations.

ITT’s transportation segment generates roughly one-third of overall revenue, so the momentum in domestic new car sales has been a boon for the firm. Domestic new car sales reached 12.7 million units last year and are expected to hit 13.6 million units in 2012.

The company will also benefit from the increased activity in the oil and gas industry resulting from the rise in global energy demand. ITT is a key equipment supplier to several oil majors, and produces a line of pumps used to remove waste liquids from wells along with equipment used in offshore oil rigs, pipelines and refineries.

In the coming years, ITT’s growth will be driven by its continued expansion in emerging markets, which already account for about 30 percent of the company’s revenue. Improvement in the US auto industry and growing energy demand should support long-term revenue growth of about 8 percent annually. ITT has a solid balance sheet, with almost $700 million in cash and a debt- to-equity ratio of 0.4. Additionally, shares of ITT yield 1.6 percent, with a payout ratio of roughly 35 percent that affords the possibility of further dividend growth.