(MONEY Magazine) – After five years of unprofitable diversification into long-distance service and telephone equipment manufacturing, GTE Corp. has decided to concentrate on its basic business: providing local telephone service. Analysts think that decision is good news for investors, especially those seeking an above-average yield and a growing dividend. Since last fall, GTE has sold both its phone equipment business and its share of the money-losing U.S. Sprint long-distance network. Even though Sprint may soon turn a profit, analyst James M. McCabe of Nomura Securities in New York City applauds GTE. ''They are returning to the low-risk business they know,'' he says. Local service is likely to grow increasingly profitable, analysts believe. The spreading use of fax machines and mobile telephones will boost revenues. Equally important, new GTE chairman James L. ''Rocky'' Johnson has begun cutting costs just as state telephone regulators are starting to adopt rules that will improve GTE's profits. Traditionally, rates of return were fixed. But increasingly, states are allowing companies to keep part of the profits that come from cost savings. GTE, which provides service in parts of 31 states, including Texas, California and Florida, now resembles the seven regional Bell companies formed by the breakup of AT&T five years ago. GTE's 6% yield is comparable to theirs, but analysts believe that GTE will raise its dividend 8% to 9% annually over the next five years, or a point or two faster than most of the Bell companies. In addition, GTE has a head start in businesses from which the Bell regionals are banned by the court ruling that broke up AT&T. These so-called information services include the sale of software and systems to retail chains that link computers in all their stores. Analyst Richard Toole of Merrill Lynch, who recommends GTE principally for long-term income investors, believes the stock could return 20% -- including yield and capital gains -- over the next 12 months.

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