Earnings before interest and taxes (EBIT) came in at 665 million euros, just above an average analyst expectation of 653 million euros and a year-earlier profit of 971 million euros, which included a 141 million-euro one-off gain.
The improvement partly reflects the shift of investments to more stable and higher-margin business areas such as lighting, medical systems and domestic appliances, which also explains why Philips has raised its dividend to match its new peer group.
"It's our biggest dividend increase in 10 years," Chief Executive Gerard Kleisterlee told CNBC television.
Analyst Eric de Graaf at Petercam said the "raise in dividend is positive and the 2007 outlook also looks positive."
Philips, the world's biggest lighting maker, a top-three hospital-equipment maker and a top-five consumer electronics producer, reiterated its target for sales to grow by 5 to 6% in 2007 and for earnings before interest, tax and amortization of at least 7.5% of revenues.
The maker of shavers, televisions, lamps and x-ray machines, is the third major electronics company to publish results after rival Samsung Electronics from South Korea reported a 1% sales increase and General Electric from the United States saw sales increase by 11%.
Philips owns large stakes in flat display supplier LG. Philips LCD and Taiwanese contract chip maker TSMC, which are jointly valued at 10 billion euros. It has said it will sell those stakes and look for takeovers, although it has not made massive moves like GE, which has announced takeovers worth $15 billion in recent weeks.
Philips shares are up around 11% since January 2006, outperforming a wider range of technology peers in the European technology index which are up 4%.