Shares of Altria (NYSE:MO), the leading tobacco company in the U.S. and strategic partner of cigarette company Philip Morris International, have fallen over 25% in the last year. That comes in spite of the company showing big earnings gains -- but those numbers can be deceiving. Rather than having big money-making potential, Altria has a good chance of burning investors in the years ahead.

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Tobacco sales in decline

The war against tobacco companies has taken a turn in the last few years. Emerging markets like China provided a growth outlet for years even while smoking in developed countries like the U.S. started to fall out of favor. Increased regulation, more consumer education, and higher prices have caused global cigarette volumes to decline since 2012, though, according to data from research group Euromonitor.

Tobacco companies have responded by raising prices and merging into fewer companies. While that has boosted the bottom line, recent results from Altria show the drop in smoking might be taking a toll. Altria's total smokable product volumes fell 5% in 2017 and another 4.1% in the first quarter of 2018. That has caused the flat revenue performance, although higher profit margins from cost-cutting and a lower tax rate after U.S. tax reform passed late in 2017 have helped earnings spike higher.

To return to sales growth, Altria has been doing joint work with Philip Morris on new reduced-risk heated tobacco products. Philip Morris has been selling its iQOS heated tobacco system overseas and an application for sales approval in the U.S. is pending with the FDA. There are no guarantees that will fly, so Altria has also submitted applications to approve chewing tobacco and other smokeless products as a reduced-risk products as well. Nevertheless, the uncertainty of the situation has contributed to the stock's recent declines.

A chalkboard drawing of a scale with reward on one side and risk on the other.

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Smoking alternatives are just that: an alternative

There has been much hype around reduced-risk heated tobacco in particular, as investors hope it can eventually offset lost cigarette sales, possibly even putting nicotine-containing products back into growth mode. Philip Morris may be showing that is overoptimistic thinking, though. The iQOS system started out red-hot, but sales have been cooling off dramatically with each passing quarter.

The ultimate problem is that heated tobacco products are more likely to replace cigarette smoking than they are to bring a new segment of consumers into the fold. Altria has no doubt thought of that and has made beer and wine investments as well -- through holdings in Anheuser-Busch InBev and wine subsidiaries like Chateau Ste. Michelle -- but those are small considerations compared to tobacco and have turned in stagnant performances. Cigarettes made up 88% of revenue last quarter, and Altria's brands held just over half of all U.S. market share. The company thus has a lot more to lose than it does to gain. 

That isn't to say investing in big tobacco is a worthless endeavor. Altria continues to return value to shareholders with a 5.1% dividend yield, and there is another $505 million left of its share repurchase plan through the end of the year. Those should keep the stock buoyed for some time. However, with its primary business in secular decline, Altria is not a millionaire-maker stock.

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.