Altria (MO 0.24%) owns the Marlboro brand in the United States, which held a massive 42% market share in the first quarter of 2023. The company's overall market share is 47% when you take into account all of its brands.

That's a great position to be in, but there's a problem with the business: Fewer people are smoking. That changes the dynamics, and the company's three cigarette price increases in the first seven months of 2023 could be a sign of problems to come.

The cash cow model

Altria is a consumer staples company, and it operates very similarly to others in the space. It sells a modestly priced product that consumers buy on a regular basis. In this case, the product has addictive properties, which in some ways makes it even more attractive. The problem is that, unlike toothpaste, toilet paper, or frozen dinners, cigarettes also cause cancer (and other diseases).

A person putting their hand up to say no to tobacco cigarettes.

Image source: Getty Images.

That's why there's a broad societal push to reduce smoking. And this push has already had a material impact on Altria's business. If you look back over the past five years, the company's cigarette volume has declined roughly 23%. That's a massive drop in a very short period of time. 

And yet Altria's huge 8.3% dividend yield, backed by a growing dividend, is a key attraction point for investors. With volumes falling, the only way to maintain that dividend record is to increase the price of each item sold to support revenue and earnings. This is exactly what Altria has been doing.

How long can this last?

Like other consumer staples companies, Altria has been dealing with fast-rising inflation. One way that a company passes its rising costs on to consumers is to increase prices. So that's a second push toward higher cigarette prices. And that likely explains the three price hikes Altria implemented in the first seven months of 2023.

However, price increases have a somewhat predictable impact in the consumer staples space, as consumers either buy less of the brand they prefer or trade down to cheaper options. 

For items like food and toilet paper, higher prices won't change long-term product demand. And normally, when customers adjust to the new prices, they go back to buying the brands they prefer.

For cigarettes, however, the trend toward fewer smokers brings with it very different risks. Altria doesn't just risk pushing loyal customers toward cheaper options; it risks pushing them to stop smoking entirely because the costs of smoking simply get too high. 

Management has to find the balance between price and demand that allows it to keep the business going -- or at least allows the cash cow to be milked for the longest period of time before the milk runs dry. At some point, it is likely that ongoing price increases result in consumer costs that lead to a downward demand spiral, from which Altria will be unable to extract itself. The more increases it forces on customers, the closer it gets to this tipping point.

Monitor this development

Three price hikes in seven months may or may not be a warning sign on that front. It could just be inflation that is pushing the company to make needed price changes. Consumers have so far been fairly willing to accept price hikes in the consumer staples space. So investors may not need to worry about Altria right now.

But it will be important to watch the company's cigarette volumes this year to see how customers react. If there's a material volume drop that goes along with this trio of price hikes, long-term dividend investors might want to rethink their expectations for Altria and its dividend.