MADRID, EUROPE: Europe's largest telecoms company, Telefonica (TEF.MC), is to pay a bigger than expected dividend in 2010, it said on Friday when cutting its earnings forecast to a level analysts had anticipated.

The Spanish operator, which made a 2.55 billion euro ($3.8 billion) bid to buy Brazilian GVT on Wednesday, also forecast annual revenue growth of 1-4 percent from 2008-12, and a rise in operating income of 4-7 percent per year.

"Although it seemed difficult for Telefonica to surprise the market at this stage, they have done it again with these forecast which are clearly above expectations," analysts at brokerage Banesto said.

Telefonica said in a statement ahead of an investor day presentation it would pay a 2010 dividend of 1.40 euros, up from 1.15 euros this year and ahead of analyst expectations for 1.27 euros, according to Thomson Reuters I/B/E/S poll.

The company scaled back its earnings ambitions for next year to 2.10 euros per share, which had been a "stress case" scenario, from 2.30 euros. Many analysts had spoken of the company having indicated the 2.10 level, but Telefonica had not officially revised the 2.30 euros target until now.

Despite that, a Thomson Reuters I/B/E/S poll had seen consensus EPS of 1.83 euros in 2010.

Telefonica shares were up 2.5 percent to 19.695 euros at 0800 GMT, having risen 21 percent this year versus a 7.3 percent gain for the DJ Stoxx telecoms sector

Chairman Cesar Alierta, due to speak of the robust nature of the telecoms industry, said that despite the economic downturn Telefonica expected "massive broadband penetration... and an explosion of (telecoms) traffic," according to text made available in advance of his speech.

But with an expected buyback failing to emerge, analysts will be looking for reassurance that Telefonica, traditionally an acquisitive company, will be able to keep purchases to a minimum.

The proposed GVT deal, at a 15 percent premium to a bid from French entertainment and telecoms company Vivendi last month, was welcomed by analysts as a good fit with Telefonica's Brazilian assets at a price justified by its growth prospects.

Alierta offered the possibility that "tactical share buybacks may be considered for free cash flow excesses."

According to CSFB, Telefonica's 2010 dividend represents a yield of 7.3 percent versus the sector's 6.6 percent. The 2012 DPS implies a dividend yield of 9.1 percent versus the sector's 7 percent.