NEW YORK (TheStreet) -- A certain fast food stock is expected to give shareholders double-digit returns each year over the next several years. 

This stock has a 3.6% dividend yield. Over the next five years, this company is expected to grow earnings-per-share at a respectable 7% a year. The company's estimated 7% earnings-per-share growth rate combined with its 3.6% dividend yield gives investors an expected total return of 10.6% a year going forward.

This stock is a Dividend Aristocrat. It has paid increasing dividends each and every year for 38 consecutive years. It is also a Top 10 stock based on The 8 Rules of Dividend Investing. The embattled fast food stock is none other than McDonald's (MCD) - Get McDonald's Corporation (MCD) Report .

Jim Cramer's charitable trust Action Alerts PLUS owns McDonald's and recently reaffirmed his faith in the stock. Read his analysis here.

Growth Prospects

As mentioned above, McDonald's is expected to grow earnings-per-share at 7% a year over the next five years. This is a conservative estimate based on the company's history. McDonald's has grown earnings-per-share 10.8% a year over the last decade.

The plan is to open new stores in international markets, repurchase shares, and to grow comparable store sales. Over the past decade, McDonald's has reduced its share count by 3% a year. It has also expanded its store count by 3% a year, on average.

With 3% store count growth and 3% share count reductions each year, McDonald's needs to grow comparable store sales at just 1% a year to achieve 7% earnings-per-share growth. If McDonald's can generate comparable store sales growth above 1% a year, the company will grow earnings-per-share even faster.


McDonald's traded for a forward price-to-earnings ratio of 17.6. The company is significantly cheaper than its fast food peers. The forward price-to-earnings ratios of McDonald's competitors are shown below:

McDonald's peer group has an average forward price-to-earnings ratio of 25.4 versus only 17.6 for McDonald's. Additionally, McDonald's current dividend yield of 3.6% is higher than it has ever been. The company appears significantly undervalued relative to its peers. If McDonald's can shrug off the recent bad news surrounding it (discussed below), the stock could surge higher as its price-to-earnings ratio expands.

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The Bad News

McDonald's is much cheaper than its peers because it is reeling from multiple sources of bad news. Here is what has dragged down McDonald's over the past year:

All of the scandals above have negatively impacted McDonald's results. In January, the company posted comparable store sales in the U.S. of 0.4%. Comparable store sales in Europe were up 0.5%. APMEA (Asia-Pacific, Middle-East, Africa) comparable stores sales fell 12.6%.

McDonald's posted negative comparable store sales growth in the U.S. and Europe for much of 2014. The company has returned its stores to growth in these two important regions. APMEA suffered due to a steep drop in Japanese sales. McDonald's very clearly has a quality control issue in Japan. Most of the issues in APMEA are temporary in nature. The company's continuous advertisements will eventually push the one-time negative events surrounding the company out of consumers' minds, and comparable store sales will rise.


McDonald's CEO has been replaced as a result of the company's recent struggles. Current CEO Don Thompson will resign in March. He will be replaced by Steve Easterbrook. Easterbrook successfully returned McDonald's U.K. operations to growth through better brand management and a simplified menu. He appears to be an ideal candidate to replace Don Thompson at the helm.

Final Thoughts

McDonald's is a high quality business as evidenced by its 38 consecutive years of dividend growth. The company has a high dividend yield of 3.6% and solid growth prospects going forward. The company looks very cheap compared to its peers at the moment due to all the negative news surrounding the company. As Warren Buffett famously said:

Be fearful when others are greedy and greedy when others are fearful.

The crowd is fearful of McDonald's at the moment. The question is, will you be greedy and invest in McDonald's and its 3.6% dividend yield?

This article is commentary by an independent contributor. At the time of publication, the author held MCD.