UPDATE 4-Eaton profit beats estimates, shares jump

* Q2 shares ex items $0.23 vs $0.14 expected

* Q2 sales down 32 pct to $2.90 bln

* Dividend maintained

* Shares up 8 pct (Adds portfolio manager comment, updates shares)

NEW YORK, July 20 (Reuters) - Diversified manufacturer Eaton Corp ETN.N, a maker of hydraulics, electrical control systems and truck transmissions, reported a higher-than-expected quarterly profit on Monday and said it would maintain its dividend, sending shares up 8 percent.

The company slashed its own earnings forecast, citing weakness across its markets, but said it expected 2009 earnings to come in above Wall Street estimates.

Net earnings for the second quarter dropped sharply to $31 million, or 17 cents a share, from $337 million, or $2.03 per share, a year earlier.

Excluding acquisition-related charges, Eaton earned 23 cents a share. Analysts on average had expected 14 cents, according to Reuters Estimates. In April, Eaton had forecast earnings at about 25 cents.

Revenue fell 32 percent to $2.9 billion, compared with Wall Street forecasts of $3 billion.

Eaton said it was maintaining its $2 annual dividend -- one of the highest among industrial companies -- despite analyst speculation that the company would reduce the payout to conserve cash.

Its shares rose 8 percent, or $3.55 to $48.46 in afternoon trading on the New York Stock Exchange, after earlier gaining as much as 11 percent.

Part of the rally was due to the dividend news, said Jeff Markunas, manager of the RidgeWorth Large Cap Core Equity Fund, which owns about 100,000 Eaton shares.

“They can tough this out and they’ll maintain the dividend because they have the earnings power to support it beyond this year,” he said.

Markunas added the second quarter was likely the washout quarter for industrial companies that don’t have financing subsidiaries, like Eaton, and beating dramatically reduced expectations could emerge as an earnings-season theme for industrial companies.

“Things are probably reaching the all-bad mark; but just as important, expectations have gotten lower,” Markunas said.

“People have ... managed to get their expectations lower than the aggressive cost cutting actions these companies have managed to engineer. These aren’t good quarters by any stretch of the imagination; they’re simply less bad than the expectations were.”

Eaton said cost cuts helped it post a profit close to its estimates, in part by boosting margins in its Electrical Americas segment. Chief Executive Officer Sandy Cutler also said the company is starting to see money flowing from government stimulus funds and expects $1 billion in stimulus-related revenue in 2010 and 2011. [ID:nN2077945]

Eaton said it now expects its end-markets to decline 21 percent to 22 percent, versus 15 to 16 percent in its April forecast. It expects its U.S. markets to fall more steeply than overseas markets, citing weak truck production, shutdowns at U.S. automakers, and steep declines in European electrical markets.

It said it expects its end-markets to decline at a faster rate than it had forecast in April.

It estimated full-year operating earnings of $2.00 per share to $2.20 per share, compared with its April forecast of $2.50 to $3.00 -- but still above Wall Street estimates of $1.92 a share. (Reporting by Nick Zieminski; Editing by Gerald E. McCormick and Maureen Bavdek)