Falling U.S. smoking rates are not Altria's biggest risk. Getty Images.

Altria (NYSE:MO) is something of a paradox. As noted by Fool One Analyst Morgan Housel last year, the company has been the most-successful investment during the last half century. At the time of his writing, Altria had provided an annual return of approximately 21% per year since 1968.

On the other hand, demand for Altria's core product, smokable tobacco, has cratered. In 1968, the United States' adult smoking rate was close to 40%. Since then the adult smoking rate has been cut in half and is at all-time lows. Like all investments, Altria has risks, but it's not what most investors think.

Falling smoking rates and market turmoil aren't Altria's biggest risks

A common risk noted for Altria stock is the aforementioned declining smoking rates. But when one considers the company has been the best investment during the past half century while smoking rates have been cut in half, this narrative seems to fall apart. Altria has been able to raise the price of its product to compensate for lower smoking rates.

The Center for Disease Control, or CDC, has set an optimistic goal of a smoking rate of 12% as its Healthy People 2020 Goals figure. Even the government agency in charge of eradicating smoking understands a 0% smoking rate is unattainable. Smoking rates should continue to fall, but at a slower pace than in years past, and will be partially offset by population growth.

As a sin stock, Altria is less affected by macroeconomic effects than the average stock. Altria's current beta is .67, which is one-third less than the overall market. In the event we have a wide-scale recession like the one we had in 2009, Altria should be less affected than the average stock. Hence, systemic risk, or decreasing demand for its core product, does not appear to be the biggest risk to Altria as an investment.

Currently, valuations are Altria's biggest risk

The biggest risk to Altria right now is the company's current valuation levels. As of this writing, shares currently trade for nearly $67 per share, sitting close to split-adjusted all-time highs. Here's a chart of Altria during the current decade:

MO Chart

MO data by YCharts.

The stock is currently trading at a price-to-earnings ratio of 23, and sports a dividend yield of 3.4%. On a 10-year basis, these are the most-expensive valuations for the company. High share prices are to be expected, as all three averages -- The Dow Jones, Nasdaq, and S&P 500 -- are sitting near all-time highs. However, Altria's price-to-earnings ratio and dividend yield have continued to expand, as price increases have outpaced earnings and dividend growth.

Since 2010, Altria's price-to-earnings ratio has nearly doubled, and the company's dividend yield has nearly been cut in half. By comparison, the S&P has seen its PE ratio increase from approximately 21 times in 2010 to 26 times today, only an increase of 24%.

Dividend yield is even more telling. The greater S&P 500's dividend yield has remained remarkably stable at approximately 2% versus Altria's dividend yield decrease of half. This shows that the greater market has been growing earnings and dividend payouts to support share-price increases, whereas Altria has not.

Altria has been the beneficiary of a low-interest-rate environment, and many investors have bought the stock as a low-volatility income investment. In the event the company has a short-term operational hiccup, or the Federal Reserve raises interest rates on lower-risk government bonds, the stock could sell off on valuation concerns. That's the biggest risk to Altria, and one that appears to be getting more relevant by the day.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.