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* Dividend increase is larger, earlier than expected
* Ford's Q1 payout to common shareholders to exceed $370 mln
* Automaker's shares rise more than 2.5 percent
By A. Ananthalakshmi and Deepa Seetharaman
Jan 10 (Reuters) - Ford Motor Co doubled its quarterly dividend on Thursday to 10 cents per share, its highest in seven years, betting it can boost earnings even as it tries to staunch losses in Europe and deal with flagging market share in the United States.
The automaker's move, which could attract yield-hungry investors, reflects Ford's belief that it has the firepower to overhaul its European unit. Ford expects to lose at least $3 billion in Europe over the next two years.
"The doubling of the dividend illustrates Ford's internal confidence in the amount of cash that will be required to execute its European restructuring plan," said Jefferies analyst Peter Nesvold in a research note.
Ford's shares rose 37 cents, or 2.8 percent to $13.84 in afternoon trading on the New York Stock Exchange.
The first-quarter payout to common shareholders will cost the No. 2 U.S. automaker more than $370 million. The Ford family, which holds a separate group of shares that hold more voting power, will receive $7 million a quarter.
Ford last paid a 10-cent dividend in June 2006. Shortly after that, the company reduced and later suspended its quarterly payout as it scrambled to avoid bankruptcy during the height of the recession.
"Ford's plan is to grow its dividend, consistent with earnings and liquidity growth, to a level that is sustainable through all business cycles," Ford said on Thursday.
The larger-than-expected increase was announced earlier than analysts predicted. Nesvold, who expected the move to occur in late 2013, boosted his price target on the stock by $2 to $16.
Ford shares, which gained 20 percent in 2012, jumped as much as 3.5 percent to $13.94 on the New York Stock Exchange. Shares of rival General Motors rose 42 percent last year.
At the Detroit auto show next week, Ford will unveil a compact crossover under its luxury brand, Lincoln, as well as an early look of its upcoming F-150 pickup truck, the top-selling vehicle in the United States.
Ford is struggling to keep up with consumer demand in the United States, where its market share fell to 15.5 percent in 2012 from 16.8 percent in 2011.
Automotive consulting firm Polk forecasts Ford's U.S. market share will fall further, to 15 percent this year and 14.5 percent in 2014.
Analysts said the dividend increase bodes well for fourth-quarter earnings, due this month. Ford's U.S. sales crossed 2 million cars last year. In the third quarter, Ford posted record 12-percent margins in North America.
The increased dividend is payable on March 1 to shareholders of record on Jan. 30. RBC Capital Markets analyst Joseph Spak predicted that Ford would continually grow the dividend as the company's earnings and liquidity improves.