A Smokin' Dividend

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This article has been adapted from our sister site across the pond, Fool U.K.

You might not like the products, and you may well have a moral aversion to investing in the companies that make them, but there's no denying that the tobacco industry is a profitable one.

It also looks like a nicely defensive sector when it comes to economic hard times -- even if smokers in the beleaguered West might cut down on their smokes a little during hard times, much of the developing world is still happily puffing away with little apparent interest in related health issues.

As if to underline the strength of the business, British American Tobacco (NYS: BTI) today released a pretty healthy nine-month update, showing organic revenue growth of 7% at constant exchange rates, though actual volumes were slightly down.

523 billion smokes!
The company, apparently, sold 523 billion cigarettes during the period to September 30, which was actually down 0.6% due to a combination of the economic squeeze and increased duty. But that's still an awful lot of potentially-lethal, but very profitable, smoking going on.

British American, the world's second largest tobacco producer, told us that it has increased its overall market share in its top 40 markets, thanks to an 8% sales growth in what it calls its Global Drive Brands -- Kent, Dunhill, Pall Mall and Lucky Strike. Much of that growth in sales came from Eastern Europe and the ex-Soviet states.

As chief executive Nicandro Durante put it, "While the challenging economic conditions continued to impact consumers in some markets, other markets are showing signs of recovery ... We are on track for another year of good earnings growth."

A great return
British American Tobacco shares have been a cracking investment of late, with the share price having doubled to today's near 29-pound value in just five years. That would be a pretty good return on its own, but on top of that, shareholders have enjoyed one of the most reliable dividend payouts on the market, too, with an average yield of around 4.5% per year.

The current price puts the shares on a forward P/E of around 14.5 for this year, falling to 13.5 for next year, which, while not the biggest bargain on the planet, is about the long-term average for the FTSE. And it does reflect the expected reliability of future dividends, currently forecast to yield 4.4% this year and 4.8% next.

Buy the shares? Well, I'd buy them before I'd buy the cigarettes, that's for sure.

More from Alan Oscroft:

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