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BCE Inc. is boosting its dividend by 7 per cent, on the heels of a 5-per-cent increase announced in August.

The increase in the dividend is part of a plan for its cash that will also see the Montreal-based phone giant spend $500-million buying back shares and making a $500-million contribution to its pension plan.

George Cope, president and chief executive officer of BCE, told analysts on a morning conference call that the timing of the announcement was driven by the decision to fund the pension before year-end in order to obtain the tax benefits.

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The special voluntary contribution is fully deductible, meaning the company will be able to cut $135-million from its cash taxes in 2009. It will also decrease required cash contributions by $75-million, meaning BCE will essentially get $200-million back by the end of 2010.

Thanks to the special payment and a 15-per-cent return in its plan assets this year, BCE will cut its pension plan deficit to $1.3-billion, making it 90-per-cent funded, chief financial officer Siim Vanaselja said.

Today's announcement "gives some clarity," Mr. Cope said, because BCE feared "people would assume we didn't have the ability to do the buyback or dividend."

The plan announced Thursday marks the third dividend increase and second share buyback since BCE's attempt to pull off the biggest privatization deal in Canadian history collapsed a year ago. While the stock hit a 52-week high of $28.54 this month, it's well off the planned going-private price of $42.75.

The new dividend will be $1.74 per year, up from $1.62. The next 40.5 cent-per-quarter payment is coming up Jan. 15 for holders of record as of Tuesday. The boost announced Thursday takes effect with the dividend payable April 15 of next year.

The company completed a $1-billion share buyback in May, retiring 5 per cent of its outstanding common shares at an average price of $24.65.

UBS analyst Phillip Huang said BCE stock is currently trading at 6.1-per-cent dividend yield, but with the increase to $1.74, the yield jumps to 6.6 per cent.

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"If we assume the yield would trend back down to the 6.1 per cent level, it implies the shares will appreciate back to its recent high of [approximately]$28.50 over time," Mr. Huang said. "We continue to believe the company's balance sheet is strong and the dividend payout is sustainable into the long term."

Mr. Vanaselja said BCE is committed to that. "We intend to continue on this path in the future, making BCE an attractive yield-oriented investment proposition."

Thanks to the decision to put $500-million into the pension, the company cut its estimates of 2009 free cash flow to a range of $1.25-billion to $1.4-billion, down from August guidance of $1.75-billion to $1.9-billion. All other guidance remained the same from a November update.

For the first nine months of 2009, BCE has posted just over $3.9-billion in operating cash flow, down about 4 per cent from the prior year. During the same period, the company spent about $2.1-billion on capital expenditures, up about 6.6 per cent.

BCE considers a handful of other measures before arriving at their definition of free cash flow, an indication of what it's able to distribute to shareholders. In the first three quarters of 2009, BCE had $1.44-billion in free cash flow, up from $1.04-billion in the similar period of 2008. Its cash dividends in the first three quarters totalled just $891-million, however, giving BCE room to push the dividend up.

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