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D. Telekom hopes investments will soften dividend blow

By Harro Ten Wolde

BONN, Germany (Reuters) - Deutsche Telekom hopes major investments in Germany and the United States and a long-awaited iPhone deal will turn around its fortunes, compensating for the dividend cut it plans to pay for them.

The company said it would increase investments by more than an annual 1 billion euros ($1.3 billion) to 9.5 billion euros in 2015 from an estimated 8.3 billion euros this year, rolling out faster broadband and next generation 4G networks, as it cut its dividend by almost 30 percent.

European peers Telefonica, hit by a 17.8 percent fall in nine-month Spanish mobile revenues, the Netherlands' KPN, Telekom Austria, and France Telecom all cut dividend payments earlier this year.

"There is a clear difference with our European competitors. We are investing in the future, our peers are forced into defense mode," Chief Executive Rene Obermann told reporters.

Still investors, who had expected the dividend to be lowered to 0.60 euros per share for 2013 from 0.70 for 2012 and 0.58 euros for 2014, were disappointed with the 0.50 euros on offer.

Deutsche Telekom shares were down 3.3 percent by 1230 GMT, at the bottom of a 0.6 percent weaker sector index.

The dividend cut will save Deutsche Telekom about 850 million euros annually, analysts at FitchRatings said, adding the fact that investments were financed via dividend cuts was good for bondholders.

Yields on the company's 6-year and 12-year bonds were unchanged on Friday.

Credit analyst Michael Ridley at Mizuho in London noted that despite reiterating its leverage guidance at 2-2.5 times adjusted EBITDA, Deutsche Telekom had altered its rating target to "A-/BBB" from "A-/BBB+" previously.

"Given that Deutsche Telekom is widely considered to be a safe-haven within the European telecoms sector, we believe that this is likely to pressure spreads," he said.

Investors with a long-term view welcomed the dividend cut.

"The dividend cut is good," said Andreas Mark, fund manager at Union Investment. "We will stay invested in Deutsche Telekom. They need the money for investments, which are late but not too late."

Deutsche Telekom plans to invest almost 30 billion euros in the next three years, which will result in a drop in 2013 free cash flow to 5 billion euros from around 6 billion euros anticipated for this year.

Telekom expects to reach 6 billion euros again in 2015.

The money will go to upgrading its broadband network in Germany, where cable companies eat into Deutsche Telekom's market by offering faster Internet connections at lower prices.

The Apple deal for its T-Mobile USA unit should help entice customers seeking iPhones away from other providers and mean a return to growth in subscriptions by the end of 2013.

"It is an aggressive target but we think it is possible," T-Mobile USA Chief Executive John Legere told reporters on Friday.

($1 = 0.7700 euros)

(Additional reporting by Josie Cox at IFR and Kathrin Jones in Frankfurt; Editing by Helen Massy-Beresford)

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