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Tickers in this Article: PM, UST, UVV, AOI
Turning to tobacco stocks during an economic downturn is a habit that investors find hard to break and for good reason. Solid earnings and steady dividends from tobacco players show that the industry's defensive qualities remain fully intact. Sure, tobacco stocks are controversial investments for some, but heading into a recessionary 2009 they could help investors breathe a little bit easier.



Here are four stocks to watch in the coming year, two I would recommend and two I'm less keen on.



Philip Morris International (NYSE:PM)
Maker of the world famous Marlboro brand, Philip Morris is the biggest cigarette manufacturer outside of China. But as big as it is, the company has room to grow. Focused on expansion in non-OECD markets, such as Russia and China, management, upped the company's quarterly dividend by 17.4% and reaffirmed its full-year forecast, which is calling for adjusted diluted EPS growth of 19% to 21%. PM's strong balance sheet gives it the financial power to make international acquisitions, continue a generous share buyback program while maintaining its hefty dividend. Philip Morris is hard not to like.



Universal Corp. (NYSE:UVV)
Universal Corp. sources, purchases, processes and distributes tobacco to cigarette makers. Its earnings are on tear, up about 12% in the second quarter from the same period last year. The stock trades at a reasonable price-to-earnings multiple, and continues to pay a hefty dividend. This is stock deserves respect.



Alliance One International (NYSE:AOI)
Like Universal Corp, Alliance One buys and ships tobacco to the likes of Philip Morris, Altria Group (NYSE:MO) and Japan Tobacco. But this is one you can afford to miss. While the company did manage to produce net earnings growth in the second quarter, it continues to struggle operationally. Gross profit and operating profit were down in the quarter from the previous year. What's more, it's hard to get excited about a tobacco stock that doesn't pay a dividend.



UST Inc. (NYSE:UST)
The smokeless tobacco maker generates industry-beating profitability and rewards shareholders with a solid dividend. But, with Altria's takeover of UST scheduled for early January, it's probably too late for investors to buy in now. Assuming that the acquisition closes at $69.50, as proposed, there is little upside for new investors, with the stock already priced near that level.

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