Swisscom AG (SCMN.VX) Wednesday kept investor hopes for a hefty dividend alive as it posted strong cash flow despite missing second-quarter sales and net profit expectations.

The Bern-based telecommunications company said it generated CHF1.42 billion in operating free cash flow in the first six months, giving investors confidence the company is on track to meet its full-year goal of CHF2.6 billion and maintain its reputation for strong shareholder payouts at the year end.

Swisscom also maintained its full-year outlook for sales of 9.15 billion Swiss francs ($8.8 billion) excluding Italian broadband unit Fastweb SpA (FWB.MI), earnings before interest, depreciation and amortization of CHF3.75 billion, and capital expenditure of roughly CHF1.3 billion.

Still, second-quarter net profit missed analysts' expectations falling 7% to CHF493 million from the year earlier period, while revenue fell 0.3% to CHF2.99 billion as Italian broadband unit Fastweb SpA (FWB.MI) contributed lower sales.

Swisscom made a CHF100 million provision in the first-quarter for Fastweb after prosecutors placed its head Stefano Parisi under investigation for alleged tax fraud. Parisi voluntarily suspended himself in April, as part of an agreement with prosecutors to avoid placing the company under court administration.

Fastweb's chairman and Swisscom CEO Schloter is standing in as CEO of the Italian unit while the investigation is under way.

Swisscom shares, which have shed 1.7% so far this year amid a 6.9% drop in the Stoxx Telecom index, fell in early trading. At 0854 GMT, the stock was CHF6.20 lower, or down 1.6%, at CHF388.90, amid a 0.9% fall in the sector index.

But analysts lauded Swisscom's strong figures from its home country of Switzerland, where it faces competition and liberalization, as well as the favorable cash flow which was helped by seasonally lower spending.

Swisscom, which is majority-owned by the Swiss government, has seen increasing competition in recent years as international brands such as France Telecom SA's (FTE) Orange and Danish TDC AS's (TDC.KO) Sunrise enter the Swiss market.

"There was no strong trigger but the quality of the Swiss business is strong and is clearly compensating the more volatile Italian business and the actual currency risks," Bank Vontobel analyst Serge Rotzer said. He rates the stock at hold with a CHF405 target price.

The free cash flow goal doesn't account for costs Swisscom may face because of legal action, Chief Executive Carsten Schloter said. Swiss rival Orange Tuesday threatened to lodge a complaint against Swisscom with federal communication authority ComCom if the two mobile phone providers cannot agree on mobile termination rates. These are the fees mobile phone companies charge other carriers for calls on their networks. Swisscom in turn said it is also weighing the option of legal action if the two cannot resolve their differences.

-By Katharina Bart, Dow Jones Newswires; +41 43 443 8043; katharina.bart@dowjones.com
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