As Warren Buffett would tell us, declining industries are usually the last place investors want to cast their bets. But, while the government inhales more tobacco industry (and smoker) resources, Altria (NYSE:MO) has managed to once again increase its profit and earnings per share. So what gives?

Well, Altria has been planning for this situation for years now and is well into its aggressive cost-cutting plan. For its fourth quarter, Altria reported a $157 million cost reduction as the company stays on track for a total reduction of $1.5 billion by 2011, compared with 2006. About two-thirds of that goal has been achieved. Reported EPS from continuing operations increased by 6.1% for the quarter.

Not bad, considering that Altria's adjusted cigarette revenue (excluding excise taxes) dropped by 2.3%. The company's overall cigarette volume dropped by 11.4% for the quarter and it lost market share of 1.5 points, including a 0.4 drop in share for flagship brand Marlboro. Smokeless tobacco products volume increased by 3.6%, led by a 15.1% increase in Copenhagen.

British American Tobacco (NYSE:BTI) believes that sizeable excise tax increases don't really cause "proportionately" large fluctuations in smokers' consumption. And while that's probably technically true given the company's use of the word "proportionately," it's still clear that increased taxes have a major effect. The overall U.S. cigarette trade volume dropped by about 8% in 2009 after a 156% increase in excise taxes. Folks may not quit smoking altogether, but certainly a huge jump in cigarette prices, combined with a lackluster economy, doesn't exactly encourage smokers to stock up on $60 cartons of cigarettes.

In the next few weeks, Reynolds American (NYSE:RAI), Lorillard (NYSE:LO), and the Vector Group (NYSE:VGR) will report quarterly earnings, which should give us additional insight into who's making up for Altria's lost market share. Philip Morris International (NYSE:PM) will also serve up numbers soon, so we'll get to see if British American is right about its theory on excise taxes.

In its 2010 guidance statement, Altria concedes that the year will continue to be tough with the uncertain economy, potential competitive pricing programs, and excise tax increases from budget-strapped states. In spite of this, Altria still expects to grow adjusted diluted EPS by 6% to 8% for the year and plans to increase its dividend payout ratio target to 80%, from 75%. Personally, I don't like the $12 billion in debt that Altria is carrying right now, but the company is doing the right things with its cost reduction plans and growth in new areas including smokeless tobacco, giving investors hope that it can succeed in spite of a declining industry.

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Fool contributor Colleen Paulson does not hold positions in any of the stocks mentioned above. The Fool's disclosure policy is never on the decline.