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The tobacco industry is comprised of a small set of corporations that grow, sell and distribute tobacco and related products throughout the world. Sure, tobacco gets a bad rap because of its harmful effects on the body and its deadly addictive nature. However, the blunt truth is this is a business, and it is legal, so why not make money?

Tobacco companies are highly profitable and have a five-year average ROE of 66.06 (the highest in its sector). Tobacco is in the Consumer/Non-Cyclical sector ,which has returned 10% in the past 12 months compared to the S&P 500. Below I have narrowed down three companies that have a bright future in not only their industry, but also in your portfolio.

Philip Morris International Inc (NYSE:PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The current market price is $84.07 with a dividend yield of 3.7%. PM has a 5-Star S&P rating and outstanding fundamental data, including a ROA of 23.82% and ROE of 257.96%. Also, from 2007 to 2011, net revenues advanced at a compound annual growth rate of 8.4% while adjusted operating margins expanded to 44.1% from 41.7%.

Philip Morris reported third quarter 2011 earnings per share, excluding special items, of 1.37, surpassing the Zacks Consensus Estimate of $1.23. Currently EPS is 4.85 with a P/E of 17.33x. This EPS is slightly lower than its competitor BTI, but revenue and net income are higher. For fiscal year 2012, analysts estimate that PM will earn $5.30 and for 2013, analysts estimate that PM's earnings per share will grow by 11% to $5.89.

Furthermore, compared with the prior-year period, Philip Morris' earnings per share were up 36.4% excluding currency effect, attributed by price increases and strong volume growth in Asia. Not to mention, PM is a juggernaut in the industry; as the largest global tobacco company, PM ranks first or second in every region of the world, where it operates.

Furthermore, I love this company because of the successful multi-brand strategy. The company has seven of the world's top 15 brands, including Marlboro, the number one cigarette brand worldwide. This company has a solid foundation that is here to stay for the long run; therefore I believe this is a great stock to invest in for consistent long-term gains.

British American Tobacco plc (NYSEMKT:BTI) through its subsidiaries engages in the manufacture, distribution, and sale of tobacco products. The current market price is $98.62 with a one-year analyst price target of $105. This represents a 6.5% upside potential not including its 5.5% dividend yield (which just recently grew). The current EPS is 4.91 with a P/E of 20.08x. For fiscal year 2011, analysts estimate that BTI will earn $4.61 and for 2012, analysts estimate that BTI's earnings per share will grow by 6% to $4.90.

I like the fact that Beta is only 0.49, which makes this a safer bet than the market itself, and a 52-week return of 25.79% compared to S&P 4.44% return does not hurt the "buy" potential of this stock. The company has a market cap of 97.26B and an enterprise value of 109.87B, which shows an undervalued company. The cash from operating activities for British American Tobacco has been up for six consecutive years, and sales are up five consecutive years with no sign of a slowdown. The five-year average ROE is 33.72%, and I believe this solidifies my point of consistent growth despite a shrinking economy.

This is a safe bet that pays dividends (76% payout ratio) and has shown consistent growth. The five year profit of this stock has been almost 100%, and I do not show any reason why the next five won't offer similar profits.

Altria Group Inc (NYSE:MO) through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in the United States and internationally. Altria directly or indirectly owns 100% of each of Philip Morris USA, U.S. Smokeless Tobacco Company, John Middleton Co., Ste. Michelle Wine Estates, and Philip Morris Capital Corporation. In addition, Altria holds a 28.5% economic and voting interest in SABMiller plc. '

The current market price is $30.10 with a dividend yield of 5.5% and 96% payout ratio. PMI's spinoff and separation from MO has enhanced growth by providing an improved focus on market dynamics, competitive frameworks, and opportunities. Also, analysts view the acquisition positively as it will provide MO with a strong presence in the MST (moist smokeless tobacco) category.

Based on forward PEG, MO currently trades at a >100% premium to its Tobacco Industry peers. On average, the company has traded at a >100% premium over the past five years, which shows a consistent pattern of performance within its industry. With a beta of 0.39, a profit margin of 53.79% and a 4-Star S&P rating, MO has a deadly combination to consistently show 52-week returns of 17.39%.

The competition:

Ticker

Price

Market Cap

EPS

P/E

52-Week Return

PM

84.07

136.32B

4.85

17.33

31.85%

BTI

98.62

94B

4.91

20.08

25.79%

MO

30.10

60.90B

1.64

18.35

17.39%

RAI

41.69

24.02B

2.4

17.37

23.53%

LO

128

16.75B

7.99

16.02

61.29%

VGR

18.22

1.45B

0.93

19.95

5.93%

Disclosure: I am long PM.

Source: 3 Smokin' Hot Tobacco Stocks