Screen Shot

Is the sun setting on the Golden Arches?

Talk about a stretch to forget! After recovering nicely following the Great Recession, McDonald's (NYSE:MCD) stock is down 7% since the beginning of 2012. During the same time frame, the S&P 500 has jumped almost 60%.

There are many reasons for McDonald's woes -- poor decisions regarding the menu, a tainted-food scandal in China -- but what investors really want to know is what's in store for the company.

We've asked three contributing Fool analysts where they see the company five years from now. Here's what they had to say:

Asit Sharma: One measure of a truly great company is how it responds to an existential crisis. McDonald's understands that its problems begin with its menu, and it has taken a number of steps to regain relevance with consumers.

First, McDonald's is reducing the complexity of its menu by eliminating labor-intensive, low-value items, while stepping up marketing on its profitable core burgers, fries, and breakfast items.

Second, the company has pushed franchisees to invest in upgraded kitchen equipment, which will facilitate customization of food orders. In the near future you'll be encouraged to customize burgers and sandwiches with an ever-evolving line up of ingredients, some of them quite exotic for McDonald's.

Third, McDonald's will shift its menus to address local tastes. Future menu innovation will be much more regionally attuned, which could boost sales and margins.

Finally, management understands that to connect with millennials, these changes must be accompanied by greater brand transparency; more local sourcing of ingredients; and a focus on higher-quality, sustainable food from its vast supply chain.

The company is signaling a methodical approach to its resource allocation. McDonald's will open only 1,400 new restaurants this year, rather than the 1,500 to 1,600 originally projected. Management is also cutting $200 million-$300 million in capital expenditures for fiscal 2014, bringing total spending to $2.7 billion for the full year. This is a patient, forward-looking management team.

Is McDonald's in for a difficult one to two year stretch? Undoubtedly. Still, I predict a return to its traditional ability to beat the S&P 500 annually on a total return basis within two years, and in five years we'll again see top-line growth that annually exceeds inflation. 

Asit Sharma: One measure of a truly great company is how it responds to an existential crisis. McDonald's understands that its problems begin with its menu, and it has taken a number of steps to regain relevance with consumers.

First, McDonald's is reducing the complexity of its menu by eliminating labor-intensive, low-value items, while stepping up marketing on its profitable core burgers, fries, and breakfast items.

Second, the company has pushed franchisees to invest in upgraded kitchen equipment, which will facilitate customization of food orders. In the near future you'll be encouraged to customize burgers and sandwiches with an ever-evolving line up of ingredients, some of them quite exotic for McDonald's.

Third, McDonald's will shift its menus to address local tastes. Future menu innovation will be much more regionally attuned, which could boost sales and margins.

Finally, management understands that to connect with millennials, these changes must be accompanied by greater brand transparency; more local sourcing of ingredients; and a focus on higher-quality, sustainable food from its vast supply chain.

The company is signaling a methodical approach to its resource allocation. McDonald's will open only 1,400 new restaurants this year, rather than the 1,500 to 1,600 originally projected. Management is also cutting $200 million-$300 million in capital expenditures for fiscal 2014, bringing total spending to $2.7 billion for the full year. This is a patient, forward-looking management team.

Is McDonald's in for a difficult one to two year stretch? Undoubtedly. Still, I predict a return to its traditional ability to beat the S&P 500 annually on a total return basis within two years, and in five years we'll again see top-line growth that annually exceeds inflation. 

Rich Duprey: It's easy to look at McDonald's performance over the past year and see it as simply a bump in the road. The tainted-food scandal in China, for example, ought to be a transient issue; Yum! Brands' (NYSE:YUM) KFC division bounced back after going through a similar harrowing experience last year (though it also faces repercussions from the current Chinese crisis). 

McDonald's problem is that it is not facing just one problem, but a whole raft of them. Perhaps most prominent is the trend away from fast food toward fresher, more wholesome ingredients found in fast-casual chains such as Chipotle Mexican Grill (NYSE:CMG). Consumers want healthy dining options, which doesn't bode well for the Golden Arches.

Of more immediate and far-reaching concern is the encroachment on McDonald's primary meal: breakfast. Technomic has estimated that McDonald’s has a 31% market share in the breakfast category making it far and away the category leader. But this has proven so lucrative that rivals are now hungrily eyeing the daypart.

Both White Castle and Taco Bell unveiled new breakfast menus this year, and for the Mexican food joint at least, it seems to be having an impact. The introduction of the Waffle Taco and other items helped the Yum! Brands division increase sales by 6% last quarter. McDonald's was forced to offer free McCafe coffees just to keep same-store sales even.

Competition is only going to become more intense over time. Coupled with changes in dining tastes -- not to mention the random outbreak of food quality issues -- McDonald's stock will stay depressed for years to come.

Brian Stoffel: I find myself agreeing more with Rich: McDonald's is in trouble. But instead of focusing on operations, I'm more interested in where the company's dividend will be in 2019.

The most important metric in determining the health of a company's dividend is free cash flow: the amount of money a company brings in during a year, minus its capital expenditures. Dividends are paid from that free cash flow.

Here's how the company's free cash flow situation has fared over the past five years.

Currently, McDonald's is using about 70% of its free cash flow to pay out its dividend. That's within the realm of safety, so there is no immediate cause for concern. But the company has also increased its dividend for 37 consecutive years, and will likely continue to do so .

With same-store sales having fallen 1% so far this year -- and those losses are accelerating worldwide -- McDonald's needs to prove it can still rake in the same amount of cash. Failing that, to maintain the dividend over the long run, capital expenditures will need to be trimmed.

My point is simple: McDonald's dividend is eating up more and more of its free cash flow. If sales continue to shrink, there will be less free cash flow. Eventually, that trend will collide with a growing dividend. While the payout itself will continue indefinitely, the pace of its increases could come to a halt.

Asit Sharma has no position in any stocks mentioned. Brian Stoffel has no position in any stocks mentioned. Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.