UPDATE 2-Russia's MTS warns sales growth may slow as demand weakens
* Revenue growth seen 3-5 pct in 2014-2016 vs 5 pct in 2013
* Core profit seen up 2 pct vs at least 6.5 pct in 2013
* To raise dividend in 2014-2015
MOSCOW, Feb 4 (Reuters) - MTS, Russia's biggest mobile phone operator by subscribers, warned sales growth would likely slow during the next three years as a weakening economy curtails consumer demand.
However the company cheered investors by raising its dividend after an increase in free cash flow, sending its stock up more than 3 percent on Tuesday.
MTS said it expected sales to rise by 3-5 percent a year in 2014-2016, compared with a reduced target of around 5 percent in 2013.
It forecast the Russian telecoms market would grow by 3 percent on average in the next three years.
An economic slowdown last year took Russia by surprise, prompting cuts in official growth forecasts and debate over ways to stimulate investment.
The slowdown could prompt a fall in revenues from voice calls, already stagnating because the market is saturated, and lower roaming revenues as cash-strapped consumers travel less, MTS said.
"We are feeling (the impact of) this situation. We are linked up to it, in a way like utilities, especially when it comes to the Internet and pay TV," Vasil Latsanich, MTS's Vice President for Marketing, said.
The company also said sales of smartphones could fall as incomes are expected to decline and the cost of consumer credit may rise.
MTS, part of oil-to-telecoms conglomerate Sistema, in November cut its 2013 sales growth forecast to at least 5 percent from 5-7 percent.
On Tuesday, it also forecast growth in operating income before depreciation and amortisation for 2014-2016 at 2 percent, compared with a forecast of at least 6.5 percent for 2013.
MTS said it expected to pay a total of 90 billion roubles ($2.6 billion) in dividends in 2014-2015 - higher than its current policy indicates - because of an increase in free cash flow and higher core profit.
The company estimated its free cash flow rose to more than 60 billion roubles last year from 45 billion in 2012, helped by sales growth, cost control and a reduction in capital spending.
The current dividend policy is to pay at least 75 percent of free cash flow or, if greater, 40 billion roubles per year.
The increase is in sharp contrast to rival Vimpelcom , which last week announced a drastic dividend cut to reduce its more than $20 billion debt.
MTS's Moscow-traded shares rose 2.8 percent by 1442 GMT, outperforming the broader market index. Its New-York listed shares were up 3.6 percent.
Last year, MTS reduced its capital spending to an estimated 82 billion roubles from 88 billion in 2012, equal to 20 percent of sales against 23 percent in 2012.
This year, capital spending will rise to 90 billion roubles, or 21 percent of sales, as MTS continues to roll out 4G networks to speed up data traffic. But it would go down in 2015-2016 to 19 percent and 18 percent respectively, it said.
VTB Capital analyst Ivan Kim said he saw MTS as a good buying opportunity following a recent fall in its stock. The stock had fallen by around 25 percent in the last three months.
"The company is set to see the robust FCF (free cash flow) generation translating into healthy dividends, with an over 7 percent yield," he said.
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