June 30 (Bloomberg) -- European phone stocks, this year's worst-performing industry, climbed as investors favored companies that pay higher-than-average dividends. France Telecom SA paced gains as Smith Barney advised clients to buy the shares.

``European telecom stocks are very good value,'' said Sara Perez-Frutos, investment director at GBS Finanzas in Madrid. Her firm advises clients with $400 million including shares of Telefonica SA, Deutsche Telekom AG and France Telecom.

BP Plc led a decline among energy producers as oil fell to a two-week low in New York. Industrial-goods companies slid after ABB Ltd., the world's biggest maker of power transformers, cut its full-year profit forecast.

The Dow Jones Stoxx 600 Index added 0.1 percent to 277.14 as of 2:47 p.m. in London. The Stoxx 50 rose 0.2 percent, while the Euro Stoxx 50, a gauge for the 12 countries using the euro, increased 0.6 percent.

National benchmarks gained in 14 of the 18 Western European markets. The U.K.'s FTSE 100 Index and Germany's DAX Index both added 0.5 percent. France's CAC 40 Index climbed 0.4 percent. Iceland's ICEX 15 Index lost the most, down 0.6 percent, while Italy's S&P/MIB Index was the top gainer with a 0.8 percent rise.

Trading was below average amid expectations that the Federal Reserve will raise interest rates in the world's biggest economy for the ninth time in a year and signal more increases. The decision is due after European markets close today.

Investors are ``generally cautious ahead of the Federal Reserve interest-rate decision,'' said Ian Murrell, a trader at Wills & Co. Stockbrokers in London. ``Anything other than a quarter-point hike will be a shocker. But the accompanying statement will be closely scrutinized.''

Fed Decision

All but one of 93 economists in a Bloomberg News survey expect the Fed to lift its target rate by a quarter-point to 3.25 percent. The central bank, which raised its benchmark by quarter- point increments at every one of its policy meetings since last June, reiterated in May its plan to make future increases at a ``measured'' pace.

The number of shares changing hands in the U.K., Germany and France, Europe's biggest stock markets, was about half of the daily average this year, according to data compiled by Bloomberg.

France Telecom, Europe's second-largest phone company, added 2 percent to 24.28 euros. Smith Barney, a unit of Citigroup Inc., upgraded the stock to ``buy'' from ``hold,'' citing reduced concern about revenue declines. The shares should be trading at 26.5 euros today, analysts including Terence Sinclair wrote.

Dividend Yields

The Stoxx 600 Telecom Index, which had lost 0.1 percent this year before today, rallied 1 percent. The gauge also led gains yesterday, jumping 1.8 percent after France Telecom said it will more than double its 2005 dividend.

``The telecoms sector is quite hot at the moment,'' said Rogier Rake, who manages the equivalent of $362 million as asset manager at IBS Vermogensbeheer in Amsterdam. ``They have a lot of cash flow and I think they don't know what to do with it, so they want to give it back to shareholders.''

The average dividend yield in the 24-member Stoxx 600 Telecom Index is 3.36 percent. That's more than the 3.14 percent yield on the German 10-year bund, the benchmark for Europe, and higher than Stoxx 600's average yield of 3.1 percent.

Deutsche Telekom, Europe's biggest phone company, increased 1.7 percent to 15.35 euros. BT Group Plc, the largest British phone company, rose 1.8 percent to 232.25 pence.

Quarterly Performance

Adrian Darley, a fund manager at Gartmore Investment Management Ltd. in London, said he recently bought Deutsche Telekom shares. The company ``stands out in a market where we're not seeing a lot of opportunities across Europe,'' he said. Gartmore manages the equivalent of $85 billion.

European benchmarks are headed for their third consecutive quarterly gain and the best first half since 1999. The Stoxx 600 has advanced 5.5 percent since the end of March and the Stoxx 50 has climbed 6.4 percent. The Euro Stoxx 50 has added 4 percent. So far this year, the Stoxx 600 has increased 10 percent, the Stoxx 50 is up 9.9 percent and the Euro Stoxx has gained 7.7 percent.

The Stoxx 600 Oil & Gas Index is the best-performing of 18 industry groups in the broader measure this year, surging 23 percent. Crude-oil futures in New York, which have gained 31 percent in 2005, have dropped 6.4 percent from their record high.

BP, Europe's biggest oil company, slipped 0.3 percent to 585 pence. Cairn Energy Plc, a U.K.-based oil exploration and production company lost 1.6 percent to 1,341 pence after UBS AG analysts cut their recommendation to ``neutral'' from ``buy.''

Crude Declines

``We've had the run for the moment,'' said Michael Hughes, chief investment officer at Baring Asset Management in London, which oversees $36 billion. A record $60.95-a-barrel oil price reached on June 27 ``may be the peak.''

Crude oil for August delivery traded as low as $56.77 a barrel on the New York Mercantile Exchange, the lowest since June 17. The contract yesterday fell 1.6 percent.

ABB tumbled 6.3 percent to 8.39 Swiss francs, the sharpest fall in the Stoxx 600. The Zurich-based company said second- quarter net income will drop from the previous period.

Profit before interest and tax expressed as percentage of sales in 2005 will be between 6.6 percent to 7.1 percent because of additional charges and higher raw material costs, the company said. ABB earlier forecast a margin of 7.7 percent.

``The profit warning was a bit of a surprise,'' said Plinio Zanetti, a fund manager at Bank Hofmann AG in Zurich, which oversees about $16 billion. ``When news like this comes out it has an impact.'' Bank Hofmann owns fewer ABB shares in their Swiss fund than are represented in benchmarks, Zanetti said.

Ratings Changes

Siemens AG, the world's second-largest maker of power- generation turbines, lost 0.5 percent to 60.6 euros. Sandvik AB, the biggest maker of metal-cutting tools, lost 1.5 percent to 291.5 Swedish kronor.

Nokia Oyj, the world's biggest mobile-phone maker, slid 0.9 percent to 13.99 euros. Dresdner Kleinwort Wasserstein cut its recommendation to ``sell'' from ``hold,'' citing increasing competition from companies such as Motorola Inc.

RWE AG, Germany's largest electricity producer, increased 2.1 percent to 53.4 euros. Dresdner Kleinwort Wasserstein raised its share-price estimate to 64 euros from 54 euros, saying higher power prices will lift earnings.

Amec Plc, the world's third-biggest engineering-services business, dropped 4.1 percent to 331.5 pence. The company said it expects average weekly net debt to increase to about 400 million pounds ($718 million) for the full year from 380 million pounds in the first half because of acquisitions.

Ebro Puleva SA, Spain's largest publicly traded food company, retreated 3 percent to 14.6 euros. Compania Andaluza de Rentas e Inversiones SA sold a 3 percent stake in the company, for 66 million euros, according to a filing by its broker.

To contact the reporter on this story: Kotaro Miyata in London at kmiyata2@bloomberg.net.

Last Updated: June 30, 2005 09:48 EDT