LONDON (Reuters) — Vodafone Group Plc painted a bullish picture for 2008 yesterday as the mobile phone giant topped average forecasts for annual underlying earnings and dividends, sending its stock to five-year highs.Vodafone, the world's largest mobile phone company by market value behind China Mobile, pushed up adjusted earnings per share and dividends by 11.4 percent to 11.26 pence and 6.76 pence respectively.

Sales rose 4.3 percent, before acquisitions, to $31.1 billion ($61.67 billion), in line with forecasts.

Earnings before interest, tax, depreciation and amortisation (EBITDA) edged up to $11.960 billion from $11.766 billion in the year to March 31, 2007, after a fine in Greece and a restructuring charge, missing analysts' average forecasts of $12.13 billion, according to Reuters Estimates.

The company, which generated a hefty $6.1 billion of free cash flow in the year, also warned it expected cut-throat competition to continue to drive down profit margins in mature markets in Europe. Mobile call prices fell by 15-20 percent in Europe — and margins shrunk by 1.6 percentage points.

"We expect Europe to remain challenging," chief executive Arun Sarin told a news conference. "We have got good growth drivers but, equally, these growth drivers are being offset by pricing and regulatory pressure."

The UK-based company is banking on cost cuts, fresh products and its fast-growing EMAPA unit, which incorporates businesses in eastern Europe, the Middle East and Africa, Asia, Pacific and affiliates, to help offset tough European markets. EMAPA currently accounts for about 40 percent of group profits.

Vodafone's beleaguered shares — which started rallying last week as a $25 billion private equity bid for US wireless peer Alltel triggered talk that US telecoms giant AT&T might be eyeing the British group — spiked higher. "The company has delivered against guidance, the business is of course under pressure in places...but next year they are coming out with earnings expectations above what some people were looking for and cash flow was higher this year too.

"That's what makes Vodafone a highly attractive acquisition target...Why not have (Vodafone's US partner) Verizon buy Vodafone and sell the residual assets to AT&T?" said Robert Grindle, telecoms analyst at Dresdner Kleinwort.

Vodafone's shares hit a high of 159 pence, a rise of almost five percent, settling 4.4 percent higher at 158 pence by 12.00 GMT.