Why these FTSE 250 dividend stocks could be absurdly cheap right now

Today, I'm looking at two FTSE 250 dividend stocks that are at different stages of recovery.

My first company has made great progress, but still looks good value to me. My second stock carries more risk, but could potentially deliver very big gains.

A class act

Thomas Cook Group (LSE: TCG) is one of the oldest names in the travel business, and its experience shows. The company reported a very solid set of half-year results today, with revenue up 5% to £3,227m.

Although holiday companies normally lose money during the first half of the year, Thomas Cook has managed to shrink its. The group's pre-tax loss for the period improved from £314m to £303m, thanks to a strong performance from its airline business.

Looking ahead, it should be a strong summer for the company. Bookings for the peak season are 13% higher than at the same time last year and management report "significant growth to Turkey and North Africa".

Profits are being helped by a growing trend towards personalisation. Apparently, 13,500 people paid to use the Choose Your Room service during the first half, while 50% of available sunbeds have been pre-booked using the Choose Your Favourite Sunbed service.

I'd keep buying

Thomas Cook had debt problems a few years ago, but borrowings now appear under control. Net debt fell by £94m to £886m during the first half, as seasonal cash outflows peaked. This figure should be much lower by the end of the year.

Today's results confirmed that full-year profits should be in line with expectations. Analysts forecast a 17% rise in earnings for 2018 and a dividend has been promised for this year as well.

With the shares now trading on a forecast price/earnings ratio of 13 and a PEG ratio of 0.9, I'd rate Thomas Cook as a buy.

Higher risk, higher reward?

The AA (LSE: AA) share price has fallen by more than 40% over the 12 months, and the group's dividend has been cut. Clearly, there are some problems. In my view the biggest of these is the firm's £2.7bn net debt.

I believe this is too high to be sustainable, especially as the group's profit margins fell slightly last year. Management has cut the dividend to conserve cash and expects the group's leverage to peak at 7.8 times EBITDA earnings in January 2019, after which it should fall.

A widely-used benchmark for high leverage is 2.5 times EBITDA, so you can see how bad this situation is. Interest payments on this debt totalled £136m last year, nearly half the group's £307m operating profit.

CEO share buying

In my view, it would make sense for the AA to raise some cash through a share placing to speed up its debt reduction. This may yet become necessary, but much of the group's debt was refinanced last summer. This has given the firm's management some breathing space.

Chief executive Simon Breakwell recently spent £169,000 buying AA shares. So perhaps he sees value in the share price, which puts the stock on a forecast P/E of 8.8 for the current year. I'm reluctant to invest in a debt situation like this, but for patient investors there could be value here.

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Roland Head has no position in any of the 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.