There are lots of arguments about how to find the best dividend-paying stocks. At the end of the day, though, you're really just looking for businesses that make more money than they can spend.

Illumina (ILMN 0.87%) has never paid a dividend but has the cash flow to pay one. More importantly, it has a dominant position in the market for DNA sequencing technology that makes future profit growth inevitable. 

Next generation DNA sequencing in a laboratory.

Image source: Getty Images.

Too competitive

The Federal Trade Commission (FTC) is an important reason Illumina could have extra cash to distribute. Over the past 1 1/2 years, America's antitrust watchdog has tried to block two of the company's proposed acquisitions. 

Illumina isn't the only company in America with next-generation sequencing (NGS) technology, but the company's position is so strong that the FTC is making it hard for it to reinvest all its profits. In 2020, the FTC successfully thwarted its proposed acquisition of Pacific Biosciences, a potential NGS competitor. 

More recently, the FTC has stepped in to prevent Illumina from acquiring a potential client called GRAIL. This is an unusual situation because GRAIL is a potential customer that relies on NGS, not a direct competitor. 

Huge potential either way 

Reading DNA from a blood sample or tissue sample was a practice once limited to large laboratories, but Illumina's products have lowered the cost of doing business to rates nearly any business can afford. Prenatal genetic screening for potential health issues is quickly becoming standard practice, and Illumina even makes products to analyze genetic variation among cattle and other livestock animals. 

The market for NGS services is expected to grow by double-digit percentages year after year, reaching $26 billion by 2028. One of the main drivers in the years ahead will be the demand for highly sensitive tests that can spot free-floating DNA ejected from early stage cancer cells.

The FDA hasn't approved any blood-based multicancer early-detection (MCED) tests yet, but GRAIL could have one of the first, along with Roche and Guardant Health. The important thing to remember here is that MCED providers will still rely on Illumina, even if the proposed acquisition of GRAIL can't proceed.

All roads lead to Illumina

As biopharmaceutical companies, academic researchers, hospitals, obstetricians, molecular-diagnostic laboratories, and cattle ranchers become more dependent on Illumina's NGS machines, they produce fairly reliable cash flow. This is because each sample run uses up reagents and other goods that need to be purchased from the company.

Illumina's razor-and-blade business model is working out well, but the company wasn't immune to pandemic-related shutdowns that limited many of its life-science clients from working in their laboratories. Luckily, a great deal of the tests for COVID-19 rely on Illumina's machines and consumables, which offset losses from other clients. Revenue decreased just 9% year over year in 2020, while free cash flow increased slightly to $891 million.

Diagnostic testing hasn't dried up completely, but consumable revenue directly related to COVID-19 sank to about $20 million during the first three months of 2021. Despite COVID-19 test sales tapering off, the company recorded a blowout first quarter, now that nearly all its clients are back to work. First-quarter revenue from DNA sequencing rose about 28% compared to the previous year, and in 2021, the company expects total revenue to grow 25% to 28% year over year.

Share buybacks for now 

Illumina might not offer a dividend program yet, but the company has started returning profits to shareholders through significant share repurchases. In 2020, Illumina shelled out $736 million to repurchase shares of its own stock. If the FTC blocks its attempt to buy GRAIL for $8 billion, we can expect a lot more share buybacks in the near term.

The benefits of Illumina's recent buybacks could be offset by the proposed acquisition of GRAIL for around $3.5 billion in cash and $4.5 billion in stock. Dividend investors could end up waiting a long time for the company to begin an actual dividend program, but putting this stock into a diversified portfolio now could lead to huge payouts by the time you're ready to retire.