Tobacco stocks are considered the classic defensive investment play, because demand for tobacco products tends to remain strong regardless of economic conditions. In addition to large and steady dividends, they also offer strong growth as popular cigarette brands penetrate emerging markets.

If you don’t mind investing in a “sin sector,” tobacco stocks are a safe haven in today’s market turmoil.

A leader of the pack is British American Tobacco, or BAT (LSE: BATS, NYSE: BTI), a UK-based tobacco company that’s ranked second in the world by global market share. BAT makes cigarettes, cigarillos, roll-your-own cigarettes, pipe tobacco and smokeless “snus.” BAT has over 200 brands with dominant market share in over 50 markets and a robust presence in other markets.

In 2011, BAT sold 705 billion cigarettes in about 180 markets worldwide and is ranked among the top 60 companies by market capitalization. BAT employs about 55,000 people, from tobacco leaf farms to factories.

Tobacco companies are under tremendous pressure for the adverse health effects of their smoking and chewable products and are constantly being hit by lawsuits, increases in excise taxes, and restrictions on packaging, labeling and advertising.

BAT attempts to counter negative initiatives through corporate social responsibility, responsible operations from farm to retail, and a strong research and development program to mitigate health risks and make safer products.

More than 5.5 trillion cigarettes are made each year, with 40 percent consumed by 350 million smokers in China alone. BAT, Imperial Tobacco (NYSE: ITY), Japan Tobacco (Tokyo: 2914) and Philip Morris International (NYSE: PM) account for 75 percent of the market outside China, and 45 percent of the global market including China.

About 95 percent of BAT’s smokers consume ready-made cigarettes, with only 5 percent opting for other forms of tobacco consumption such as cigars, roll-your-own, snus, etc.

BAT has a diversified base of cigarette brands and price points to serve various identified niches by geography. BAT uses consumer insights gathered over years of market research to lead innovation in its tobacco portfolio and drive pricing and promotions. This strategy has resulted in market share gains and profit increases, despite broadly negative market dynamics.

BAT recognizes that consumers in developed countries are smoking less, because of health concerns. However, BAT uses its consumer insights to more specifically target niche segments and use more profitable product mixes to sustain revenue and profit growth. BAT’s strategy is to focus on the preferences of tobacco consumers and differentiate itself from the competition. The company also is targeting emerging markets where smoking is on the rise.

BAT’s top-of-the-line “Global Drive Brands” include Dunhill, Kent, Lucky Strike and Pall Mall. Its other major brands include Benson & Hedges, John Player Gold Leaf, Kool, Peter Stuyvesant, Rothmans, State Express 555, Viceroy and Vogue.

BAT has a solid history of dividend payments. Over the past ten years, BAT has paid quarterly dividends that have varied from quarter to quarter but increased over time. BAT typically pays a small dividend around mid-September each year and a heftier dividend around early May each year.

BAT currently pays an annualized dividend of about $3.93, for a dividend yield of 3.86 percent, with shares trading at around 105 as of late July. BAT’s targets a dividend pay out at 65 percent of long-term adjusted earnings per share.

BAT performed reasonably well in 2012, despite various regulatory and market-based head winds. For all of 2011, volume at Global Drive Brands was up 9 percent while overall volume was down a marginal 0.4 percent. With rates held at year-earlier levels, revenue rose by 7 percent and adjusted profit grew by 10 percent. The company repurchased 28 million shares in the year at a total cost of $1.15 billion and authorized $1.9 billion for share buybacks in 2012.

BAT’s corporate social responsibility was recognized once again when it was included in 2011’s Dow Jones Sustainability World Index for responsible businesses.

For the year 2011, revenue was $23.7 billion (after duty, excise and other taxes), up 3.5 percent on an exchange rate adjusted basis and factoring in translation from British Pounds to Dollars at GBP 0.649 to $1.

BAT reported operating profit of $7.3 billion, up 9.3 percent, and an adjusted operating profit of $8.5 billion, up 10.7 percent, that excludes restructuring and integration costs, amortization and impairment of trademarks and goodwill, and pollution settlement charges to clean up tobacco farm sediment in the lower Fox River in Wisconsin.

BAT closed 2011 with multiple litigation cases (including several class action cases) against it across the globe, for which it incurs ongoing legal and periodic settlement expenses.

After paying non-controlling interests, BAT had a net profit of $4.8 billion, up 7.5 percent from 2010 annual results, and fully diluted earnings of $2.41, up 8.2 percent from $2.22 a year ago. Results included revenue and profit gains from the acquisition of Protobaco of Columbia in 2011 

Source: British American Tobacco

BAT’s cash dropped 5.8 percent in the quarter, intangible assets were down 3.7 percent and property, plant and equipment dropped 2.2 percent, leading total assets lower by 2.7 percent to $41.8 billion. Outstanding borrowings were 4.6 percent lower at year-end, primarily due to exchange rate effects and debt-related derivatives. Shareholders’ equity was down 11.2 percent due to dividend payouts and share repurchases.

Source: British American Tobacco

Operating cash flow increased 1.7 percent, reflecting growth in underlying operations. More than $1.1 billion was used for investments in property, plant and equipment, the purchase of intangibles tied to its Protobaco acquisition, and other investments in subsidiaries and associates. Financing activities consumed $6.2 billion for share repurchases, repayments of borrowings, purchase of non-controlling interests and dividend payments. 

Source: British American Tobacco

Although BAT has not reported financial results, management did issue comments on performance in the quarter. Overall, revenue grew by 6 percent, using constant currency exchange rates (and 4 percent at current exchange rates that reflect a strengthening British Pound). Volume of its Global Drive Brands grew 6 percent.

BAT volumes were higher despite overall industry declines, and BAT expects this momentum to continue into 2012 and also sees a moderation of declining demand.

In the first three months of 2012, BAT sold 166 billion cigarettes (versus 164 billion sold in the same period in 2011). Cigarette volume was up due to BAT’s October 2011 acquisition of Protobaco and sales increases in Bangladesh, Brazil, Denmark, the Middle East and Vietnam, but was partially offset by volume declines in Italy and South Korea.

Lucky Strike volumes were up 26 percent, due to strong growth in Chile, France, Germany, Poland and Spain. Kent volumes were up 7 percent, due to growth in Azerbaijan, the Middle East, Japan, Russia and Ukraine. Pall Mall was up 4 percent; Dunhill volume was mostly unchanged.

In February 2012, BAT resumed share buybacks and bought close to 5 million shares in the quarter for a total cost of $230 million. BAT continued to be financially strong as it exited the quarter.

BAT’s shares have performed well over the past decade. More recently, shares rose from a low of 46 in March 2009 to their current level of about 105, an all-time high.

BAT has a market capitalization of $101.4 billion, many times over its book value of $13 billion, and shares trade at a price-to-earnings (P/E) ratio of 21.4, with a dividend yield of about 3.86 percent. Buy British American Tobacco up to 135.

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Todd Johnson publishes Dividend Lab, a web site focused on income investing.