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By Shannon Zimmerman | 10-09-2012 11:00 AM

No Taboo With Apple's Dividend

Contrary to a decade ago, investors are seeking dividends from big-name tech firms, and Apple's payout makes the stock attractive for those who want both income and value, says ClearBridge's Michael Clarfeld.

Shannon Zimmerman: For Morningstar, I am Shannon Zimmerman. I'm here today with Mike Clarfeld of Legg Mason ClearBridge Equity Income Builder and several other strategies, and we'll talk about those in a bit. But let's focus initially on Equity Income Builder, and you are comanager there with Hersh Cohen, who I think has been managing money since the Carter administration, right?

Michael Clarfeld: Yes. Hersh has been managing money since Carter, maybe even earlier than the Carter administration.

Zimmerman: Maybe before the administration.

Clarfeld: Maybe before the administration, yes. Hersh has done phenomenally well over a very long period of time.

Zimmerman: That's true at this fund and then also Legg Mason ClearBridge Appreciation (Cohen stepped down from managing this fund in 2010).

Clarfeld: Exactly. With a disciplined approach that we think that stands test of time. And the disciplined approach that Hersh has always run and how we run this fund today is focusing on high-quality companies that can compound returns at attractive levels over the long term. And we believe that approach is really one that works throughout all market cycles. We actually feel like those types of stocks that fit that approach are particularly attractive today, making this a very good time for our investing approach.

Zimmerman: Let's talk about a couple of names in particular they were the top two holdings of the fund. ExxonMobil which is sort of a classic large value; the fund is in the large value category at Morningstar. And you expect to see ExxonMobil in a fair number of portfolios, but not Apple. But Apple is the number-two holding. How can that be?

Clarfeld: So, a good question. Actually let's start with Apple since that one stands out more. What's interesting you mentioned large value and traditionally you wouldn't expect potentially Apple in a large-value fund. You also probably wouldn't expect Apple in an income fund at least not until recently. We've owned Apple for about two years, and really what drove us to Apple where several things.

All of our analyses start with balance sheets, and Apple's balance sheet now is arguably the strongest in the entire world. Apple has close to $100 billion in cash. I mean these are mind-boggling numbers. When we bought it, it wasn't $100 billion, but it was probably $30 billion or $40 billion or $50 billion.

All of our analyses always starts at balance sheet, so Apple has really a truly fortuitous balance sheet, tens of billions and now $100 billion in net debt. Then we look at the business and our investment approach is really focused on high-quality businesses. So, there are lots of different ways to find names to invest. Some people run screens and see what screen is cheap, and that's one way, and that's good way of doing it. But it's not we do. What we really do is find best-in-class businesses that we think will be successful over long periods of time.

When we looked at Apple, what we saw was that it was in a very large and very quickly growing marketplace with a vastly superior product, and that actually given the whole app phenomena and the app marketplace, the App Store, the more people who use Apple [products], the more developers who want to make products for Apple. There is actually a network effect where more people using the product actually made it stronger.

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