MONTREAL - BCE (TSX:BCE) investors got an early Christmas present Thursday as the telecom giant announced plans to raise its dividend and repurchase shares a day after its newest wireless competitor launched its cellphone service.

Canada's largest telecom company said it was raising its annual common share dividend by seven per cent as it continues to churn out cash amid hefty profits, rising revenues and strong wireless growth.

Montreal-based BCE, which operates under the Bell and Bell Aliant brands, said it was increasing its dividend to shareholders to $1.74 a share for 2010. The dividend is payable April 15, 2010.

BCE said it was also planning a share buyback of up to $500 million as well as a $500-million special voluntary pension contribution from its year-end 2009 surplus cash balance.

The announcements come on the heels of Canada's fourth and newest wireless provider, Wind Mobile, announcing its competitive cellphone service, which has put pressure on established players Telus (TSX:T), Bell and Rogers (TSX:RCI.B).

"BCE is committed to delivering attractive ongoing returns to our shareholders and has done so through consistent and sustainable dividend increases and share buybacks since December 2008," said George Cope, president and chief executive of BCE and Bell Canada.

Cope added that the company's strong balance sheet gave it the financial flexibility to raise its dividend while continuing its capital investment in Bell's networks and service programs.

The announcements mark the third increase to the annual common share dividend, and the second share buyback, since termination of the company's proposed $52-billion privatization agreement in December 2008.

That deal, which would have seen the company sold to a group led by the Ontario Teachers Pension Plan board, disappointed many BCE shareholders who had wanted to cash in on their holdings through what they saw as an attractive offer.

BCE said its annual common share dividend has now increased 19 per cent since the fourth quarter of 2008.

BCE added that the special voluntary pension contribution is expected to decrease its annual pension funding requirements and pension expenses in 2010 by up to $75 million and $45 million, respectively.

Moody's and Dominion Bond Rating Service said Bell's plans for allocating its cash has no immediate impact on their ratings.

Jonathan Allen of RBC Capital Markets said a dividend increase was expected to be announced next February. But the announcement was confirmation of the company's commitment to dividend growth and balancing stakeholder interests.

The timing was mainly driven by the need to make a pension contribution by year-end.

Coming one day after Wind Mobile's launch in Toronto "also strikes a note of confidence within the company: confidence in positive earnings growth, and confidence that Bell can deal with new wireless competition," he wrote in a report.

UBS analyst Phillip Huang said he expects the dividend increase and share buyback will eventually push the company's shares back to its recent high of around $28.50.

"We continue to believe the company's balance sheet is strong and the dividend payout is sustainable into the long term," he added.

In Thursday trading on the TSX, BCE shares rose 88 cents to $27.26, a gain of 3.34 per cent.

By buying back its shares, BCE reduces its equity base, spreading profits over fewer shares. That increases its return on equity and earnings per share, two key ratios used to determine a company's financial health and investment rating.

In addition, most share buybacks lead to stock price increases as there are fewer shares on the market for investors.

BCE is one of Canada's most widely held stocks so the dividend increase and share buyback are good news for millions of investors who hold the company's stock either directly or through mutual funds or their pension plans.

In its most recent financial report released last month, BCE said it earned a quarterly profit of $558 million or 72 cents per share for the third quarter, up from a profit of $248 million or 31 cents per share last year.

Operating revenue totalled $4.46 billion, up from $4.44 billion a year ago as the company scooped up 501,000 new wireless customers, although customers on average were spending less than a year ago due to the weaker economy.

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