Is Westpac's 9.5% dividend yield safe?

The Westpac Banking Corp (ASX: WBC) dividend is sitting at 9.5%. Is this too good to last?

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Like its 'Big Four' stablemates, the Westpac Banking Corp (ASX: WBC) share price has done very well out of 2019 so far and has started the new financial year off with a bang. Westpac shares started 2019 trading around the $24.50 mark but closed yesterday for a price of $28.25 – a rise of just over 15% (not including dividends).

Speaking of dividends, many income investors would be familiar with Westpac's fat dividend yield. Since 2015, Westpac shares have paid a dividend of 0.94 cents per share every six months ($1.88 per share annually). Despite this year's price appreciation, Westpac shares are currently yielding a dividend of 6.65%, or 9.5% grossed-up with franking credits.

Being one of the larger dividend yields on the ASX (certainly one of the largest in the ASX 50), we should ask ourselves if this juicy yield is sustainable going forward? Or will Westpac follow its cousin National Australia Bank Ltd. (ASX: NAB) and cut its dividend in the future? Lets take a look.

What is Westpac's balance sheet looking like?

It's not promising on an early read. In Westpac's half-yearly update for the six months ending March 2019, Westpac's cash earnings per share (EPS) came in at 96 cents per share. With an interim dividend of 0.94 cents per share, I would go out on a limb and say that the current dividend is not looking too safe. During this period, net profit was down 24%, return on equity down 3.5% and EPS down 23% compared with the same period last year.

Westpac CEO Brian Hartzer stated in the report that "this is a disappointing result reflecting weaker business conditions and the bank dealing decisively with outstanding issues, including remediation and resetting our wealth strategy."

What does this mean for Westpac's dividend?

In my opinion, it all comes down to whether these declines in profitability are structural or temporary. If the one-off costs from the Royal Commission remediation and the wealth business restructuring fade and Westpac is able to increase profitability going forward, then things might not be so bad. But this ever-so-slim gap between EPS and dividends per share is very concerning nonetheless.

Foolish takeaway

The future is looking cloudy for all of our big banks and Westpac's dividend is closest to the cliff edge (in my opinion. Although the juicy 9.5% yield from Westpac shares is looking tempting, I myself would be waiting for the next set of results to come out in order to see if the downward trends in profitability showed signs of reversing before opening a position.

Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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