Two distinct messages come out of Imperial Tobacco's latest trading update. The first is that cash-strapped smokers are turning to the black market in numbers probably not seen since the Second World War.
According to Imps, the last few weeks have seen the proportion of cigarettes smoked in the UK which have not had any tax or duty charged on them shoot up to 20 per cent from just 16 per cent late last year.
That means the Chancellor, George Osborne, is missing out on one in five fags smoked. The cost to the Treasury is now well above £3bn a year. He should now start worrying about the diminishing returns he is getting, having added an extra 70p on a packet through his last two Budgets.
HMRC data shows that tobacco duty raised £9.1bn in 2010, £9.6bn in 2011 and an estimated £9.7bn in 2012. Could 2013 be the first time total tobacco duty raised actually falls?
As for Imps, the black market problem is much more than the UK. It stretches right across Europe and into Russia. The overall decline in legal cigarette consumption across the European Union is now reckoned to be 7 per cent. That is far more than the normal 1 per cent a year decline seen in most developed countries over the last few decades. For Imps, this means first-half profits will be down on last year.
Investors took fright and marked the shares down by 4 per cent. But look beneath the headline numbers and the best bits of Imps are doing rather well. Cigar sales were up 3 per cent in the first quarter, and sales of the top international brands Davidoff, Gaulloises, West and JPS rose a stunning 12 per cent. This indicates that smokers who are not in the grip of austerity are choosing to smoke more and smoke better.
So that bodes well for Imps as it pushes for growth in markets with fast-growing middle class consumers. In the meantime, a 4.3 per cent dividend yield makes it well worth waiting for Imps' plans to come to fruition.