* Free cash flow set to improve after cost cuts
* Metals, coal stabilising, to support earnings
By Atul Prakash
LONDON, Sept 20 (Reuters) - Dividend yields at British mining companies have hit a five-year low just as cash flows in the sector improve, prompting some analysts to call for higher payouts as early as next year.
A slump in demand in recent years, owing largely to China's economic slowdown, led to sharp drops in prices of coal and metals, leaving companies nursing heavy losses and high debt and forcing them to slash payouts and spending plans.
But now, after several quarters of furious cost-cutting, repaired balance sheets and a recovery in commodity prices, mining companies could restore or even boost dividend payouts, Credit Suisse (SIX:CSGN) said.
Free cash flow yield, a measure of balance sheet health, is poised to rise to 7.1 percent for major miners next year. Dividend yields are forecast to almost double to 3.6 percent, according to Credit Suisse.
"While we are not bullish on the outlook for the core commodities, underlying FCFs and dividends look relatively attractive against the market and this should provide a degree of valuation support," said Credit Suisse.
Current dividend yields have slipped below 2 percent for the first time since 2012, and are especially low when compared to the yield for the broader UK stock market. A ratio of the two is the lowest since late 2011, according to Thomson Reuters data.
Prices of coal have recovered this year, partly on the back of capacity cuts in China, while copper, iron ore and aluminium prices have steadied after sliding to multi-year lows. Dividends: miners vs the rest