Activision Blizzard Inc posted better-than-expected results on Wednesday, fueled by its hit holiday release Call Of Duty: Modern Warfare 2, and shares rallied as the company said it would start paying an annual dividend.

Activision's stock rose 4.5 percent in after-hours trading.

The world's largest standalone game publisher by market value has risen above much of the turmoil in the gaming industry thanks to blockbuster titles like Call of Duty and its margin-friendly online game World of Warcraft.

Activision declared an annual dividend of 15 cents a share, and also announced a $1 billion stock buyback program.

It shows you the strength and the confidence we have, Chief Executive Bobby Kotick said in an interview with Reuters. Still, he said, the macroeconomic conditions hurting the video game sector have not improved.

Activision posted a net loss of $286 million, or 23 cents a share in the fiscal fourth-quarter ended December 31, versus a year-ago loss of $72 million, or 5 cents a share.

Excluding items, Activision earned 49 cents a share, beating analysts' average estimate of 43 cents a share, according to Thomson Reuters I/B/E/S.

Revenue fell 5 percent to $1.6 billion. Non-GAAP revenue came in at $2.5 billion, better than the Wall Street estimate of $2.23 billion.

Sales in the quarter were led by the latest release in the Call of Duty franchise, which has sold nearly 12 million units in the world's biggest video game markets, according to industry trackers NPD Group, GfK Chart-Track and Enterbrain.

In addition, online games like Activision's World of Warcraft earn higher margins than packaged software games.

Last year was a difficult one for the video game industry, as casual gamers dialed back on their spending. Software sales slid 11 percent last year in the United States, the world's largest market.

But many analysts expect game software to grow robustly this year over the depressed levels of 2009.

Activision, which often issues conservative targets, set a forecast for the current quarter and 2010 that was below Wall Street's targets.

For 2010, Activision forecast non-GAAP earnings of 70 cents a share and non-GAAP revenue of $4.4 billion. That was lower than the average analyst estimate for a profit of 73 cents a share on revenue of $4.8 billion.

Shares of Santa Monica, California-based Activision closed at $10.10 on the Nasdaq and rose to $10.55 in extended trading.

(Reporting by Gabriel Madway; Editing by Robert MacMillan, Gary Hill)

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