Altria (NYSE:MO), the largest tobacco company in America, is generally considered a solid income investment. The company has hiked its dividend every year since spinning off its international business as Philip Morris International (NYSE:PM) in 2008, and it currently pays a forward yield of 4.2%.

I once owned Altria, but eventually sold it and bought some telecom stocks instead. But I've still been watching Altria to see if it's worth buying again. The stock seems cheap at 8 times earnings, but that P/E was reduced by the one-time windfall it received from AB InBev's (NYSE:BUD) buyout of SABMiller. Its forward P/E of 18 is more in line with its industry peers.

Altria's flagship Marlboro cigarettes.

Source: Pixabay.

That high yield and low valuation should certainly limit Altria's downside potential. However, I'm still not buying the stock again for a simple reason -- its business model just isn't built to last.

Why will Altria eventually burn out?

As a domestic tobacco company, Altria's growth is tethered to adult smoking rates in America. According to the CDC, that percentage plunged from 42% to 15% between 1955 and 2015. To offset those declines, Altria usually raises prices, cuts costs, and repurchases stock to protect its earnings growth -- thus ensuring that it can keep paying its dividend.

But this strategy can't last forever. The average price of a pack of cigarettes already hovers around $10 in several states due to rising excise taxes. Altria's total smokeable product (including cigar) shipments fell 2.7% annually last quarter, with its flagship Marlboro brand and other premium brands leading that decline. Its discount brands experienced the smallest decline (0.5%), indicating that higher prices were impacting consumer choices.

A woman smokes a cigarette.

Source: Getty Images.

Moreover, multinational tobacco giant British American Tobacco (NYSE:BTI) recently acquired Altria's biggest domestic rival, Reynolds American, to become the biggest publicly traded tobacco company in the world. That merger threatens Altria, especially if British American lowers prices on top Reynolds brands like Newport, Camel, and Natural American Spirit to gain U.S. market share against Altria.

To exacerbate that pain, the FDA announced new plans to regulate tobacco products in late July. The agency wants tobacco companies to reduce nicotine levels to "non-addictive" levels, and plans to review flavored cigarettes (like menthol) and e-cigarettes more closely. Those new rules could throttle sales of stronger cigarettes Marlboro, making it even harder for Altria to grow its revenues amid declining smoking rates and rising taxes.

But Altria can still tread water...

Altria knows that its smokeable business will eventually burn out. That's why it diversified into smokeless tobacco (snuff), wine, e-cigarettes, and a stake in brewery SABMiller -- which is now a stake in AB InBev. But those businesses still generate a tiny percentage of its revenue compared to its core cigarette business.

But investors also shouldn't worry about Altria's business falling off a cliff. Analysts expect its revenue to rise 2% this year and another 2% next year as it keeps offsetting lower shipments with higher prices. Altria's earnings are expected to grow 8% this year and 9% next year as cost-cutting measures and buybacks support its bottom line growth.

Thanks to a $5.3 billion pre-tax cash windfall from the SABMiller deal, Altria still has plenty of room to raise its dividend, buy back stock, or make additional acquisitions to widen its moat. There's also the possibility that Philip Morris International will buy Altria, reuniting the two halves of Philip Morris to counter British American's purchase of Reynolds.

The key takeaway

I don't think Altria is a bad investment. Its low valuation and high yield should support its stock price, and it still has room to hike prices in most states. But it also faces tough questions about its long-term growth amid declining smoking rates, tighter FDA regulations, and tougher competition from British American Tobacco.

Therefore, I'd prefer sticking with more reliable income stocks -- like telcos or utilities -- to get a comparable yield with a lot less drama.