‘Extremely volatile’ is an apt description for Admiral Group’s (LSE:ADM) share price performance during the past year. There were more wild movements last week following a positive reception to half-year trading numbers.

At current prices of £23.30, Admiral shares still carry market-beating dividend yields. For 2023, the FTSE 100 firm boasts a yield of 5%, far ahead of the 3.7% index average.

And things get even better for next year. For then, the dividend yield marches to 5.5%.

But how realistic are current forecasts? And should I buy the motor insurance giant for my shares portfolio?

Recovery in sight?

Like its share price, Admiral’s record when it comes to dividends has also been highly choppy in recent times.

The business has a long record of payout growth behind it, driven by a mix of juicy ordinary and special dividends. In 2021, total dividends leapt 78% year on year to 279p per share, the sale of its Penguin Portals unit creating a supplementary 92p dividend in that time.

However, dividends crashed down to 157p per share last year — even accounting for more disposal-related special payments — as soaring costs caused profits to plummet. Ordinary dividends dropped to 112p from 187p over the period.

City analysts expect total dividends to fall again to 117p in 2023. But they are tipped to rise to 127.7p per share in 2023 as profits grow again.

Admiral’s decision to cut total dividends by 15% for the first half of 2023, to 51p, underlines the pressure that persists at the firm. The ordinary dividend fell to 38p from 44.2p a year earlier.

The insurer’s Solvency II ratio dipped 3% in the first half, to 182%. This — along with weak dividend cover of 1.1 times for the next two years — casts a shadow over current dividend forecasts, in my opinion.

Are Admiral shares a buy?

Having said that, Admiral’s solid first-half performance provides signs of encouragement. Revenues leapt by 21% between January and June, to £2.24bn, which in turn pushed pre-tax profit 4% higher to £233.9m.

This reflects pricing actions the company has made to offset high claims inflation. Prices across new business and policy renewals at its core motor unit rose by 20% in the first half.

That said, as a potential investor I’m concerned about whether the business can keep this momentum up. There is only so far that premiums can be hiked during this cost-of-living crisis before policies become unaffordable.

High levels of competition mean consumers have plenty of opportunity to shop around for a better deal, too. News that total motor policies dropped 7% at Admiral during the first half is a warning of the damage price hikes can do.

At the same time, towering cost inflation continues to pressure Admiral. Motor claims inflation is being tipped at 10% by the company for 2023. And it could remain a problem beyond this as shortages of mechanics, car parts, and new vehicles drags on.

The risk of buying Admiral shares remains significant right now. And I don’t believe this is reflected in the firm’s forward P/E ratio of 18 times. Despite its high dividend yields, I’d rather buy other shares for passive income.

The post 5.5% yields! Here’s the dividend forecast for Admiral shares for 2023 and 2024 appeared first on The Motley Fool UK.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Admiral Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.