Source: Altria

Altria Group (NYSE:MO) will report fourth quarter and full-year earnings on Jan. 30th. After another great year for the stock, investors will get a chance to see whether the underlying fundamentals of the business kept pace.

Altria shares rose more than 30% last year, but the core business deteriorated through the first three quarters, as cigarette use saw yet another annual decline. While Altria management believes it can counteract this trend with price increases to drive revenue growth and share buybacks to boost earnings growth, that strategy failed to work for most of 2014.

Management needs two things to play out. First, volume declines will need to be less than anticipated -- this will help maximize revenue growth from price increases. Second, Altria needs to demonstrate significant progress in its newly launched e-cigarette brand, MarkTen. E-cigs are the first true growth catalyst to come around for the tobacco industry in years, but Altria was late to the game. Its tardiness caused Altria to lose critical market share to competing products like blu e-cigarettes.

These two issues should be front and center for investors when Altria reports earnings later this month.

Revenue strategy losing effectiveness
It is no surprise that smoking is on the decline in the United States. In fact, trends only seem to be getting worse. Altria suffered a 3.5% cigarette volume decline in the first nine months of 2014, up from 3% in 2012. In response, Altria regularly increases prices and competes for market share to keep revenue growth intact.

However, that strategy has been unsucessful the past several quarters. Altria raised prices by $0.12 last quarter to an average of $5.98 per pack, a 2% increase on a percentage basis that fell below volume decline rates, resulting in total revenue declines. Naturally, Altria management must carefully weigh any price increases against the possibility of alienating customers and thus sacrificing volumes even further.

The impact on Altria's business is clear. Revenue and earnings per share declined 0.1% and 4.5%, respectively, in the first three quarters of 2014. That's why investors should closely watch smoking declines in Altria's Philip Morris USA segment, which houses the flagship Marlboro brand.

Altria needs a growth catalyst
When it comes to growth, many investors believe multiple product lines can help the company blunt the impact of declines in smoking. On the surface, Altria seems to be doing well in that regard, as it operates the Chateau Ste. Michelle wine business, smokeless tobacco brands Copenhagen and Skoal, and a significant equity investment in brewer SAB Miller. But the truth is smokable products, principally the Marlboro brand, still make up 90% of Altria's profits.

These side businesses are too inconsequential to save Altria from the deterioration in its core smokable-products business. Smokeless product revenue grew just 0.1% in the past nine months while wine revenue grew 4% in the same period -- total revenue for the company still declined.

Altria does have an opportunity in the form of e-vapor products. Altria estimates that the e-vapor category grew 40% last year, now a $1.8 billion business by revenue. The company has ventured into e-vapor through its subsidiary Nu Mark, which manufactures the MarkTen brand.

Source: NuMark website.

Altria initially began a trial of its MarkTen products last year in Indiana and Arizona. After seeing satisfactory results, the company rolled the brand out nationally. Through the end of last quarter, MarkTen achieved distribution in 80,000 retail outlets across the country, and according to Altria, the product was ranked in the top three e-vapor brands in the western U.S. by retail market share.

Altria planned to complete its national expansion to the eastern half of the country in the fourth quarter. Investors should pay specific attention to what Altria has to say about the progress of this initiative.

Focus on cigarette volumes and e-vapor updates
Altria is well known among income investors as one of the best-regarded dividend stocks of all time. It offers a hefty 4% dividend yield that towers above the 2% offered by the S&P 500. Not only that, but Altria is also a premier dividend growth stock. Altria has increased its dividend 48 times in the past 45 years, including a solid 8% raise last year.

But investors cannot focus solely on the dividend payout alone. Sustainability of the dividend is an important issue to keep in mind, and Altria needs to produce growth if its future is going to be as lucrative as its past. Cigarette volumes are declining at a faster rate than the company can raise prices, and its success in the booming e-vapor category remains uncertain. These are the two issues investors should pay close attention to when Altria reports fourth-quarter earnings.