Best Buy Co's board raised its quarterly dividend by 7 percent to 16 cents a share and approved a plan to buy back $5 billion of common stock, sending its shares up 3 percent.

The increase in the dividend takes effect with the October 25 payout to shareholders of record October 4, the world's largest consumer electronics chain said in a statement on Tuesday.

Sales at Best Buy stores open at least 14 months have fallen consistently in the past four quarters, but some investors still prefer the company for its steady cashflow and its ability to stay profitable and pay dividends.

While the sales environment remains challenging, we believe the company is taking the appropriate steps to adapt and may be better positioned than the stock is getting credit for, Credit Suisse analyst Gary Balter noted.

Best Buy shares have fallen 8 percent year to date, while the larger S&P Household Durables Industry index <.GSPHHD> fell 5 percent.

The buyback and dividend increase were encouraging signals to investors, more analysts said.

They are sitting on $2.2 billion of cash. I think it makes sense to return some of that value to shareholders, said Anthony Chukumba, an analyst with BB&T Capital Markets, which makes a market in the securities of Best Buy.

The retailer is also reducing its U.S. superstore square footage by 10 percent over the next five years, which in turn means smaller capital requirements, Chukumba pointed out.

There have also been some media reports that Best Buy may put its European expansion on hold, although the company has not confirmed it.

They have got just less to do with their money quite frankly, Chukumba said.

Best Buy's new $5 billion share repurchase program replaces the retailer's prior $5.5 billion buyback plan, which had about $800 million of remaining authorization as of the first quarter ended May 28, the company said ahead of a meeting with shareholders.

Best Buy shares were up 3 percent at $32.49 in morning trading on the New York Stock Exchange.

(Reporting by Dhanya Skariachan, editing by Gerald E. McCormick, John Wallace, Dave Zimmerman)

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