Telefonica Raises Dividend, Lowers Forecast

By JASON SINCLAIR AND ANA GARCIA

MADRID --Telefonica SA pledged Friday to increase shareholder returns with higher dividends, but lowered its forecast to 2012 amid falling revenue in mature European markets.

Europe's largest telecommunications company by market value also lowered its earnings per share target to €2.10 for 2010, down from previous guidance of €2.304.

"Two years ago when we met no one would have expected the most profound economic downturn in decades," Telefonica's chairman Cesar Alierta said in the company's biannual Investors Day.

Despite the sea change, Mr. Alierta said the telecommunications sector was resilient and that Spain's telecom's sector was likely to recover by 2011. "Telefonica will excel even more when the market turns around," he said.

Earlier Friday, Madrid-based Telefonica said it would pay a €1.40 dividend for 2010, up 21.7% from €1.15 last time, and that its 2012 dividend would be at least €1.75 a share.

The company said its revenue compound annual growth rate, or CAGR, until 2012 would increase 1% to 4%. Two years ago Telefonica had set out a revenue CAGR of between 5% to 8% for the period 2006 to 2010.

Analysts were upbeat on Telefonica's forecasts. Banesto, in a research note, described the dividend guidance as a "positive surprise," adding that shares would likely react well, at least in the short term.

Telefonica shares were recently trading up 1.5% at €19.50, outpacing an overall negative Spanish market.

Morgan Stanley said the company's 2010 EPS guidance, although lower than Telefonica's expectations two years ago, was ahead of the brokerage's expectations. "We are only 14 months away from the end of 2010 and we see this guidance as a very strong message," it said.

Telefonica said in a separate presentation that it would use any additional cashflow for a future share buyback, but didn't provide further details.

In the past, Telefonica has used aggressive buybacks to reward shareholders. The company said it targets a free cash flow in excess of €40 billion between 2009 and 2012.

Telefonica also said it would be selective with mergers and acquisitions, limiting this to consolidation in markets where it already operates and to spectrum auctions. The company reiterated that it wants to increase its stake in China Unicom to 10% from the 8.4% it has now, giving it a stronger foothold in the world's largest telephony market.

In a show of force, Telefonica bid $3.7 billion for Brazilian telecommunications company GVT Holding SA Wednesday, in a move to preserve its market share in Brazil, topping a previous bid from French media and telecoms conglomerate Vivendi SA.

Telefonica has relied increasingly on solid revenue growth in its Latin American markets as the economic downturn, regulation and increased competition hits its mature markets in Europe, especially in Spain.