Altria Group's (NYSE:MO) first-quarter earnings sent shares up slightly to $38.60 last week. The stock price is 12% higher than its recent low; it hit $34 in early February after disappointing earnings and a sharp decline in cigarette shipments. Fortunately, the company delivered better first-quarter results. In addition to commendable cigarette volume, Altria updated its progress on cigarette alternatives and provided guidance for capital allocation. Read on to find out what you need to know about Altria's first-quarter results.

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Cigarette volume
Altria's recent first-quarter performance was much better than Q1 2013. Excluding excise taxes, Altria's smokeables revenue decreased 0.2% on a 2.5% decrease in volume. After adjusting for inventory changes, cigarette shipments decreased 3.5%, besting the industry's 4% decline. Marlboro shipments decreased 2.4%, but the brand picked up 0.2% in market share. Marlboro now has a 43.8% share of the U.S. cigarette market. On the other hand, Q1 2013 volume decreased 4% after adjusting for inventories on a 4.5% industry decline. First-quarter 2013 smokeables revenue declined 2.6%, and Marlboro volume decreased 5.5%.

In addition to better overall industry performance, Altria's Q1 2014 results improved due to the success of Marlboro brand extensions. For instance, Marlboro Black -- a special blend based on the flagship brand -- has had tremendous success in the market. has also enabled Altria to increase customer interaction with the brand. These brand extensions have helped Marlboro gain share even as volume decreases.

Besides Marlboro brand extensions, Altria's smokeless products have also helped it offset cigarette volume declines. First-quarter smokeless revenue increased 6.4% excluding excise taxes, led by an 11.1% volume increase in Copenhagen shipment volume. Copenhagen grew its market share by 1.5% in the quarter thanks to Copenhagen Long Cut Wintergreen snuff. However, at less than one-tenth the size of the smokeables segment, Altria's strong smokeless segment does not move the needle on overall revenue or earnings.

The U.S. Food & Drug Administration recently provided guidance on how it intends to regulate the emerging category. The federal agency's proposed regulations are relatively light; the rules ban sales of e-vapor devices to minors but allow for advertising and flavorings. However, the rules require FDA approval for e-vapor devices, possibly slowing down innovation.

Altria is entering the e-cigarette market as part of a broader strategy to satisfy the desires of all adult tobacco consumers. It is rolling out its MarkTen e-cigarette nationwide after claiming the top market share in its Arizona test market. CEO Marty Barrington told analysts that e-vapor products will not be the only innovations coming from the industry in the years ahead. Although he did not specify what products may be in the pipeline, he may have been referring to heated tobacco products, or new innovations that have yet to be conceived. In any case, it is clear that Altria must innovate if it wants to grow revenue.

Capital allocation
Altria is a cash cow that is about to receive another injection of cash. Over the last three years, the company has paid a total of $1.2 billion to tobacco growers as part of a federal program that began in 2004. After the federal program ends later in 2014, Altria's expenses will decline by $400 million per year, freeing up cash to return to shareholders.

Although management did not directly address the impact of the program's expiration, the company intends to maintain an 80% payout ratio of adjusted diluted earnings per share. Thus, most of the additional free cash flow will go straight to shareholders as a dividend. The rest could go toward share repurchases and e-cigarette advertising, though management did not specify.

Foolish takeaway
Altria started off 2014 better than it ended 2013. Cigarette volume was in line with expectations but still declined. The FDA's proposed e-cigarette regulations give companies substantial leeway in advertising, which favors cash-heavy players like Altria. Finally, the company continues to return most of its earnings to shareholders each year -- the right strategy for a company that is past its prime. All in all, long-term shareholders should find nothing to gripe about in Altria's first-quarter results.