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2 dirt-cheap income stocks I think are worth buying today

The global economy is booming and this is excellent news for recruitment companies such as Pagegroup (LSE: PAGE) and Robert Walters (LSE: RWA).

However, it seems as if the market is overlooking these companies despite their improving operating performance. I think this could be a great opportunity for investors to snap up shares in these two growth and income stocks at attractive valuations.

Global growth

At the time of writing, shares in Page are changing hands at depressed 13.1 times forward earnings and a PEG ratio of 1.1 as City analysts have pencilled in earnings per share growth of around 13% for 2019. This isn’t particularly cheap, but it’s not particularly expensive either, and I think it undervalues the Page’s long term potential.

Today, the company reported an 11.7% year-on-year increase in gross profit for the first quarter of 2019, a strong performance and enough to convince management the group is well on the way to meeting City growth forecasts for the year.

On top of this, management is also highly confident the company will be able to achieve its long-term goal of delivering £1bn of gross profit and £200m — £250m of operating profit. This implies substantial growth in earnings per share from current levels.

According to my calculations, based on the fact the company reported operating profits of around £143m 2018, earnings per share could rise by as much as 75% in the near term as the business focuses on its goal of achieving £250m of operating profit.

As well as potential capital growth, City analysts believe the company is on track to pay out 24p per share in dividends to investors for 2019, giving a potential dividend yield of 4.9%. With this level of income on offer and potential capital growth of as much as 75%, what’s not to like?

Cash-rich

Robert Walters has similar attractive qualities as an investment, in my opinion. Analysts soured on the business towards the end of last year, but since the beginning of 2019 City growth estimates have been trending steadily higher. Analysts now believe the company will report earnings per share growth of around 9% for 2019, giving earnings per share for the year of 50p.

Based on these estimates, the stock is trading at a forward P/E of 11.8, which seems cheap compared to Page’s multiple.

At the same time, the recruitment business has a net cash balance of £74m (31 December 2018), equivalent to around 16% of its market capitalisation at the time of writing.

Adjusting Robert’s valuation to take cash into account, gives a cash-adjusted P/E of approximately 10, which I believe undervalues the company because this is one of the most profitable businesses trading on the London market. Last year, it reported a return on capital employed — a measure of profitability for every £1 invested in the business — of 32.3%, putting it in the top 10% of the most productive UK listed companies.

On this basis, I reckon the stock deserves a P/E of at least 14. On top of this, the shares support a dividend yield of 2.7% and the distribution is covered three times by earnings per share.

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Rupert Hargreaves owns no share 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.