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It seems to be the positon of the majority that we are either heading for another recession or a prolonged period of slow growth.

Based on public sentiment and the degrading economic indicators, I am of the opinion that there is between a 25 and 40 percent chance of recession. So it would seem prudent to look at one of the most recession resistant industries: Big Tobacco.

A negative economic outlook seems to do little to inhibit consumers from lighting up. So with the threat of a double dip recession looming and the Fed pledging to keep interest rates low until at least 2013, I feel that the tabacco industry is a great place to look for possible investments.

click to enlarge table

Altria (NYSE:MO)

Description: Altria engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally. It is the former parent company of Kraft Foods (KFT) (spin-off was in 2007) and Phillip Morris (NYSE:PM) (spin-off was in 2008). It offers cigarettes under the Marlboro, Virginia Slims, Parliament, Benson & Hedges, Basic, and L&M brands.

Valuation: MO is currently trading at $26.60, which gives it a market cap of 54.9 billion. This makes it the 3rd largest company on the list. It currently has a trailing multiple of 16.17 and a forward outlook of 12.17. This values it fairly as all 5 companies currently have multiples that fall in between 14-17.

Financial Metrics: Altria has the falls right in the middle of the list with respect to its 38.86% operating margin. It has the second highest return on equity ratio at 74.44%. However, it also has the second highest debt to equity ratio at 293.23. This may seem high but all of the companies in the tobacco industry tend to have high debt to equity ratios.

Dividend Analysis: MO provides a fantastic $0.41 quarterly dividend which puts its yield at 6.20%. It has one of the higher payout ratios on the list at 93%. Normally I would be concerned about such a high ratio. However, looking at Altria’s solid dividend history (43 consecutive years of increases) and the stability of its cash flow leads me to believe that MO’s dividend is quite safe. The company’s CFO Howard A. Willard III provided strong endorsement to this idea when he stated that it is the company's “intention to return 80% of adjusted diluted EPS to shareholders in the form of dividends.”

Phillip Morris International (PM)

Description: Phillip Morris International manufactures and sells cigarettes and other tobacco products. Its portfolio of international and local brands includes Marlboro, Merit, Parliament, Virginia Slims, L&M, Chesterfield, Bond Street, Lark, Muratti, Next, Philip Morris, and Red & White. It sells its products in approximately 180 countries in the European Union, Eastern Europe, the Middle East, Africa, Asia, Latin America, and Canada. It was the international division of the Altria group until 2008 when it was spun off.

Valuation: Phillip Morris is currently trading at $66.02. At this price it is the largest company on the list with a market cap of 115.96 billion. PM has a trailing multiple of 15.12 and a forward outlook of 12.62.

Financial Metrics: PM has the second highest operating margin on the list at 43.05%. It also has the largest return on equity ratio at 132.36%. This is a huge number and really speaks to the company’s efficiency in making profits from shareholders' equity. Phillip Morris also has the highest debt to equity ratio on the list at 326.66. It also has the largest profit margin of all its competitors at 27.52%

Dividend Analysis: The company provides shareholders with a quarterly dividend of $0.64%. This gives it the second lowest dividend yield on the list at 3.90%. Considering that the S&P 500’s average dividend yield is only 2.13% this is still very respectable. PM also has the best dividend payout ratio on the list at 59%. This implies that there is still plenty of room to grow for its dividend. Since being spun off from Altria in 2008, PM has paid and increased its dividend every year.

Reynolds American (NYSE:RAI)

Description: Reynolds American Inc. (RAI), through its subsidiaries, manufactures and sells cigarette and other tobacco products in the United States. It offers cigarettes under the brand names of CAMEL, PALL MALL, WINSTON, KOOL, DORAL, SALEM, MISTY, and CAPR. The company also provides smokeless tobacco products, including moist snuff under GRIZZLY and KODIAK brand names. The company was founded in 1875 and is headquartered in Winston-Salem, North Carolina.

Valuation: RAI is currently trading $36.91 which gives it a market cap of 21.52 billion. It places at number four on the list based on its size. It currently has a trailing multiple of 16.05 and a forward multiple of 13.04.

Financial Metrics: Reynolds American has the smallest operating margin at 29.69%. Also at 20.57% it has the lowest return on equity of the five stocks. However, on a positive not it has the lowest debt to equity ratio out of the five companies.

Dividend Analysis: RAI provides a solid $0.53 quarterly dividend which gives it a yield 5.80%. It has the second highest payout ratio on the list at 87%. RAI has been paying out dividends for twelve years and increasing them for the last three.

Lorillard (NYSE:LO)

Description: Lorillard engages in the manufacture and sale of cigarettes in the United States. The company offers 43 different product offerings under the Newport, Kent, True, Maverick, and Old Gold brand names. The company was founded in 1760 and is headquartered in Greensboro, North Carolina.

Valuation: Lorillard is presently trading at $109.23. Its market cap of 15.12 billion makes it the smallest company on the list. LO is trading at a slight discount to its competitors with a trailing P/E ratio of 14.94 and a forward ratio of 12.78.

Financial Metrics: It was semi difficult to get a handle on Lorillard’s key financial metrics. LO has the highest operating margin on the list at 44.62%. However, because of its recent share repurchase programs its return on equity and debt to equity ratios are not reliable numbers. LO’s return on assets ratio is 42.61% and it currently has total debt number of 1.78 billion.

Dividend Analysis: Lorillard’s currently has a dividend yield of 4.80% and a solid payout ratio of 66%. This is good enough for 3rd and 2nd place on the list, respectively. It has issued and increased its dividend for the previous 3 years.

British American Tobacco (NYSEMKT:BTI)

Description: British American Tobacco engages in the manufacture, distribution, and sale of tobacco products. The company offers cigars, cigarettes, smokeless snus, roll-your-own, and pipe tobacco products under the Dunhill, Kent, Lucky Strike, Pall Mall, Vogue, Viceroy, Kool, Rothmans, Peter Stuyvesant, Benson & Hedges, and State Express 555 brand names. It has operations in the Asia-Pacific, the Americas, eastern and Western Europe, Africa, and the Middle East. The company was founded in 1902 and is headquartered in London, the United Kingdom.

Valuation: British American has the second largest market cap of these companies at 85.62 billion. It has a trailing earnings multiple of 12.10 and a forward ratio of 16.81. With the forward P/E ratio being greater than the trailing it looks like analysts have set a bearish tone towards BTI expected future earnings. At present the company is trading at $86.42 per share.

Financial Metrics: BTI has the median operating margin of 35.and return on equity at 35.15% and 39.34% respectively. It also has a debt to equity ratio of 121.83.

Dividend Analysis: British American issues semiannual dividends to its shareholders. At the present time it has a 2.90% dividend yield. This makes it the lowest yielding member of the group. It has the median payout ratio of 76%. The company has been paying dividends for 25 years. It has also been increasing its payouts since 1998.

Source: 5 Big Tobacco Stocks Providing Solid Yields In A Downturn