UPDATE 5-Upbeat Telefonica offers hefty dividend rise

* Dividend for 2010 to be 1.40 euros, vs forecast 1.27 euros

* No share buyback, but not ruled out for the future

* Offers reassurance that buys will be selective and limited

* Latin American mobile growth to continue as group motor

* Shares down 0.1 percent

(Adds chairman comment on targets, updates shares)

By Elisabeth O'Leary and Robert Hetz

MADRID, Oct 9 (Reuters) - Europe's largest telecoms company, Telefonica (TEF.MC), announced a bigger than expected dividend on Friday despite a planned acquisition, with an upbeat business outlook justifying its generosity in the downturn.

The Spanish operator, which made a 6.5 billion reais ($3.7 billion) bid for Brazilian peer GVT GVTT3.SA this week, also forecast 1-4 percent annual revenue growth from 2008-12, and a rise in operating income of 4-7 percent a year. [ID:nN07480985]

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

Telefonica shares were down 0.1 percent to 19.200 euros at 1310 GMT, after an earlier high of 19.725 euros. Despite an initially warm welcome for new targets from investors present at the meeting, executives' presentations met a barrage of questions about whether they were attainable.

Chairman Cesar Alierta said a 2.10 euros earnings per share target for next year, down from an original 2.30 euros, was not only achievable but was the minimum level possible.

One senior analyst present at the meeting noted Telefonica would reach targets via measures such as tax gains, rather than pure growth of operations, and said that had taken some of the buzz out of the stock.

Telefonica has risen 21 percent in 2009 versus a 7.3 percent gain for the DJ Stoxx telecoms sector .SXKP.

ROBUST TELECOMS

Alierta spoke of the robust nature of telecoms at a Telefonica investor day, saying that despite a world economic slump, the company expected "massive broadband penetration... and an explosion of (telecoms) traffic".

The group sees worldwide connections rising to over 320 million in 2012 from 264 million at present, with telephony traffic up 40 percent.

Latin America is expected to continue powering Telefonica forward, with mobile accesses alone expected to increase by up to 140 million by 2012 as the region's population gets richer. [ID:nL8228595].

Telefonica said 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. The dividend will rise to a minimum 1.75 euros in 2012.

Analysts got reassurance that Telefonica, long an acquisitive beast, will be able to keep purchases selective, and limited to consolidation in markets where it is already present, although the group would look at possible candidates.

"We do think that more likely than not more opportunities will present themselves, and weaker players will have to think about their future," finance director Santiago Valbuena said.

Analysts anticipated upgrades, although one said the rise in the 2010 dividend was worth around 500 million euros, less than a buyback of up to 3.0 billion euros expected by some.

Alierta said "tactical share buybacks may be considered for free cash flow excesses".

BLACKSPOT SPAIN

"We prefer higher dividends over buybacks as we see them as more sustainable, especially when driven by better operational targets," analysts at Citigroup said.

Telefonica's blackspot is its home market, which still provides a quarter of its 58 billion euros annual revenues. Telefonica does not expect the Spanish market, where customers have been drawn to cheaper operators, to recover until 2011.

The new 2.10 euros EPS target had been a "stress case" scenario, previously given by the company. Analysts had spoken of the company having indicated the 2.10 euros level, but Telefonica had not officially revised the target until now.

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

Some analysts noted Telefonica will cut back on investment outlay to help acheive its targets, with capital expenditure in the network due to fall 7-9 percent per year to 2012.

According to CSFB, Telefonica's 2012 dividend per share implies a yield of 9.1 percent versus the sector's 7 percent. (Reporting by Elisabeth O'Leary and Robert Hetz; Editing by Dan Lalor) ($1 = 1.748 Brazilian reais)