On the surface, the most important product that Altria (MO -0.57%) sells, cigarettes, is really attractive, in business terms. Customers who smoke cigarettes tend to keep using them because, well, nicotine is addictive. The problem is that the world has changed and smoking has gone from desirable to anathema to a larger and larger swath of the country Altria serves. This is a big problem for the business.

A protected, protracted decline

For years there was a debate about whether cigarettes cause cancer. That debate is now over, and Altria and other cigarette companies have paid large legal settlements over the years. They also agreed to government regulation through the Food and Drug Administration (FDA).

A hand reaching for a neat stack of hundred dollar bills in a mouse trap.

Image source: Getty Images.

That last bit is actually a positive, because to break into the U.S. cigarette market, a new competitor would need FDA approval. That has caused difficulty for tangentially related vaping companies, with Juul essentially getting its nicotine products banned at one point. Notably, Altria invested in Juul, but it eventually wrote off the entire investment and exited the relationship in favor of buying a peer, NJOY, that was further along the FDA approval process. In all, regulation means that Altria's incumbent brands have a protected position in the market.

That, however, hasn't changed the social shift that's taken place since tobacco has been linked to cancer. People are, slowly but surely, reducing their use of cigarettes. There may be some switching in there, to things like vaping, but that isn't the big story. What really matters is that fewer and fewer people are smoking. And that's a very big deal for Altria, which has been leaning on price increases to make up for volume declines. 

Some numbers

You really start to get the feel for the problem when you see the numbers laid out in front of you. 

Metric

2018

2019

2020

2021

2022

Percentage decline in cigarette volume

(5.8%)

(7.3%)

(0.4%)

(7.5%)

(9.7%)

Data source: Altria. 

On an absolute basis, volume fell from 109.8 billion cigarettes in 2018 to 84.7 billion in 2022, a 23% drop. If you assume future declines in the 5% to 7.5% range, then unit sales could drop to between 57.4 billion and 65.5 billion cigarettes by 2027. That's a 40% to 50% drop in just a decade.

Altria has been able to increase prices to offset the ongoing declines in this business so far. But at some point, that tactic will probably just exacerbate the problem. 

Even if the company's investment in NJOY works out well, the growth in that business will probably have a hard time offsetting the ongoing declines in cigarette sales because the cigarette business is so large. The smokeable products it sells accounted for about 87% of first-quarter sales, with cigarettes accounting for the largest part of that division.

Tread carefully

Altria is working from a position of weakness even though it has dominant cigarette brands in the market it serves. The bigger trends are aligned against the company, and the way it's using price increases to deal with the headwinds could itself turn into a headwind at some point. While the stock has a huge 8.2% dividend yield, most income investors will probably be better off elsewhere.