These FTSE 250 income stocks are trading at bargain levels

These FTSE 250 (INDEXFTSE:MCX) dividend shares appear to be deeply undervalued.

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With the stock market trading near record highs, it’s become increasingly difficult to find reasonably priced shares to invest in. After strong gains over recent months, it’s unsurprising that many blue-chip dividend shares now appear to be overvalued.

However, not all shares have performed as strongly, and I believe I have found two FTSE 250 income shares which appear to have passed under the investment radars of most investors.

Unsure

After a 6% fall in its share price since the start of the year, bookmaker William Hill (LSE: WMH) now offers a tempting dividend yield of 4.6%.

William Hill has been left out of the consolidation that is shaking up the global gaming industry after its proposed tie-up with Canada’s Amaya fell through in October last year. This has left the company unsure of its next move as its rivals benefit from their increased scale and grow their online and mobile presence.

So far though, things haven’t been so bad for William Hill. Despite the introduction of new taxes and regulations in the industry, it is seeing growth in wagering and net revenue across all four of its divisions. Its international businesses in the US and Australia are doing particular well, with net revenue up 19% and 41% respectively, in the 17 weeks to 25 April. Additionally, the company has continued to deliver cost savings, and is on track to deliver annualised £40m of cost efficiencies by end of this year.

With trading momentum expected to remain strong for the remainder of the year and continued expansion overseas, I remain bullish on the bookmaker’s earnings prospects. Looking ahead, City analysts expect William Hill to grow its bottom line by 9% this year, with a further increase of 6% in 2018. These figures suggest that shares in the firm trade at just 11.5 times expected earnings this year and 10.9 times forward earnings in 2018.

Debt

Also offering steady income is AA (LSE: AA), the UK’s leading roadside assistance company. It currently yields 4.3% from a dividend which is covered by more than two times by earnings. What’s more, with City analysts expecting its bottom line to grow by 12% in each of the next two financial years, there appears to be plenty of scope for inflation-beating dividend growth in the near future.

After a 21% fall in its share price since the start of the year, valuation multiples on earnings look attractive too. It has a forward price-to-earnings (P/E) ratio of only 9.2, which suggests there may be serious upwards re-rating potential to come.

However, one big reason why its shares trade at such low valuation multiples is the company’s worrying debt levels. Its net debt was worth £2.7bn at the end of January this year, which is equivalent to more than two times the company’s current market capitalisation, or 6.75 times trailing EBITDA. And on top of this, it has a sizeable pension deficit of nearly £400m.

On the upside though, demand for roadside assistance is fairly non-cyclical, which should mean the company will have little trouble servicing its debts. The business is highly cash generative, and with big capital investments largely behind it, AA should be able to pay down debt and return more cash to shareholders at the same time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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