OREANDA-NEWS. December 16, 2015. The 2016 sector outlook for U.S. Non-Alcoholic Beverages is stable, according to Fitch Ratings. Core performance should continue to be protected by robust brands, good geographic and product diversity, solid margins along with low commodity costs and active cost rationalization. This should support stable cash flows with moderately limited growth prospects.

These factors should outweigh industry headwinds, such as secular carbonated soft drink volume declines in developed markets, slowing growth market economies, health and wellness and regulatory risks.

Fitch believes leverage is at the upper end of the rating range for The Coca-Cola Company, PepsiCo Inc., and Coca-Cola Enterprises. Companies have increased gross debt and prioritized shareholder returns to offset softer-than-expected profit growth with debt-funded repurchases, increased dividends and M&A. Fitch Ratings expects that a further focus on shareholder returns and a lack of meaningful deleveraging could lead to negative rating actions.

Consequently, if issuers want to preserve current ratings, increased leverage might begin to play a larger role in financial policy decisions, like future shareholder return targets in 2016, according to Fitch.

With significant foreign cash generation, Coca-Cola and PepsiCo have material foreign cash balances due to a reluctance to repatriate earnings. These issuers have borrowed to fund domestic activity (primarily shareholder-related outflows) causing higher gross leverage domestically relative to consolidated leverage.

In 2016, companies will leverage carbonated soft drinks (CSD) price/mix, innovation and M&A to broaden beverage portfolios and drive modest U.S. revenue growth. Fitch expects continued low single-digit CSD volume declines although product innovation, reduced pack sizes and sophisticated promotions should somewhat offset negative perceptions. Risks to CSD pricing include pressure from large retailers to invest in price. Consumer preference mix shift toward tea, water, energy, sport drinks, coffee and other value-added, health-focused options should grow at least in the mid single-digits and increase overall beverage volume.

The full report '2016 Outlook: U.S. Non-Alcoholic Beverages ' is available at 'www.fitchratings.com.' Fitch's outlook reports for other sectors and regions are also available.