As one of the world’s largest beverage companies KO operates across a diverse geographic footprint and generates stable and robust free cash flow. Where there is spread dislocation between the two, we are generally comfortable swapping between the two names, as we view both credits as capable of sustaining stable credit metrics. We note that KO’s net leverage is in a conservative position despite a recent increase in debt, at the low-end of management’s 2.0-2.5x range.

Our recommendation largely reflects our preference for KO’s pure-play beverage profile, where we are seeing more resistance characteristics than in snacking categories, where PEP generates just over half of its sales.

An unfavorable U.S. tax ruling could still result in some leverage creep depending on the ultimate outcome. KO is appealing the ruling, and we expect recent sales growth and proceeds from the planned IPO of the African bottling operations will mitigate the impact of any eventual penalty on the credit profile.

Management has expressed interest in expanding its presence over time in the alcoholic beverage category, although to this point the company has limited its involvement to licensing arrangements for its soft drink brands with large-scale brewers and distillers.

Sugar-based drinks have frequently been the target of RFK Jr’s MAHA movement, introducing risk of SNAP eligibility loss, which could create demand headwinds.